Vanda Pharmaceuticals Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Welcome to the First Quarter 2015 Vanda Pharmaceuticals Inc. Earnings Conference Call. My name is Hilda, 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 Mr. Jim Kelly, Senior Vice President and Chief Financial Officer. Mr. Kelly, you may begin.

[Jim Kelly:]

Alright. Thank you, Hilda. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals' first quarter 2015 performance. Our first quarter results were released this afternoon and are available on the SEC EDGAR system and on our website, www.vandapharma.com. In addition, we’re providing live and archived versions of this conference call on our website. Joining me on today’s call is Dr. Mihael H. 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 for the first quarter 2015 before opening the lines to your questions. Before we proceed, I’d 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 management 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, 2014 and on 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.

[Mihael Polymeropoulos:]

Thank you, Jim. Thank you all for joining us. As we discussed earlier today in our earnings press release, the first quarter of 2015 was a record quarter with increased product sales from our two US commercial products, HETLIOZ for Non-24 and Fanapt for schizophrenia. I would like to first discuss our progress with a US commercial launch of HETLIOZ for Non-24. Our strong net sales growth for HETLIOZ is driven by both continuous new patient demand and a consistent patient persistence on therapy. During the first quarter, we saw a 24% increase in net HETLIOZ revenue coupled with a 22% increase in patients on active treatment as compared to the prior quarter. We’re just beginning to reach into the addressable population of patients with Non-24 and given the estimated 80,000 potential patients in the US, we believe the significant growth opportunity for HETLIOZ in Non-24 is ahead of us. During the first quarter, we saw robust performance of our commercial engine, driven by a direct-to-consumer awareness campaign, patient health education through our case management program and physician product promotion through our account management team. The direct-to-consumer campaign continue to create new patient opt-ins at comparable rates to Q4, suggesting that this marketing medium is not saturated and there still exist a large untapped opportunity for potential patients to be engaged. In addition to the direct-to-consumer campaign, in Q1, we completed a pilot program, engaging likely patients in independent training facilities for the blind. The results of these pilots are encouraging as efficient means of directly educating patients on Non-24 and engaging them with our case management program. We estimate that there are more than 100 such programs in the US responsible for providing training for thousands of blind individuals year-after-year. We have currently launched this program nationally in the US and we are seeking to optimize over the next few months. In April, we received a positive opinion from the Committee for Medicinal Products for Human Use, bringing out a step closer to EU approval of HETLIOZ. The EU represents a potentially large opportunity with an estimate of 130,000 patients suffering with Non-24. We’ve begun our preparation for commercial launch in EU with a focus of calculating the advocacy relationships as well as preparing for the various market access processes. While our focus will remain on driving the growth of HETLIOZ for Non-24, we’re also diligently evaluating life cycle management opportunities for HETLIOZ, including a pediatric indication for Non-24, Smith-Magenis Syndrome and a development plan for jet lag, a condition that affect millions of travelers worldwide. I will now turn to Fanapt. Fanapt has been a significant revenue contributor during the first quarter even in the absence of active promotion during the transition from Novartis. As of April, our existing sales force began promoting Fanapt to psychiatrists highlighting its profile and ensuring support to physicians and patients. During 2015, we have taken significant steps to protect the exclusivity of Fanapt and three additional patterns are now listed in the FDA Orange Book in addition to the new chemical entity patent. Based on these four patents, the exclusivity of Fanapt extends to 2030. We have also taken significant steps to assert our intellectual property against infringers including continued litigation against Roxane and recently filing suit against Inventia. The court date has now been set for February 29, 2016 on the Roxane case for both the NCE and 610 patents. We are confident in our intellectual property portfolio which we will vigorously defend. As we are focusing on the revenue opportunity for Fanapt for years to come, we are also planning to move forward on label expansions to include a maintenance indication as well evaluating a development plan for the once-a-month injectable Fanapt formulation. I would now briefly turn to the rest of our early pipeline assets. We are trying to initiate a Phase 2 study in chronic pruritus with tradipitant, our neurokinin-1 receptor antagonist, seeking to confirm our findings from the 2101 study which showed a positive pharmacokinetic, pharmacodynamic association in patients with chronic pruritus in the context of atopic dermatitis. Finally, on Trichostatin A, our histone deacetylase inhibitor, we continue to progress towards a 2016 IND filing toward certain oncology indications. I will now turn the call back to Jim.

[Jim Kelly:]

Thank you, Mihael. You'll 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 enhances an overall understanding of our financial performance when considered together with GAAP figures. On a GAAP basis, during the first quarter of 2015, Vanda recorded a net loss of $10.2 million or $0.24 a share, as compared to a net loss of $26.5 million or $0.79 a share for the first quarter of 2014. On a non-GAAP basis, for the first quarter of 2015, Vanda recorded a non-GAAP net loss of $4.1 million or $0.10 a share as compared to a non-GAAP net loss of $32 million or $0.95 per share in the first quarter of 2014. HETLIOZ net product sales grew to $7.5 million in the first quarter of 2015, a 24% increase compared to $6 million in the fourth quarter of 2014. We continue to expect the first quarter of 2015 gross to net adjustments to be the highest of the year due to the Medicare coverage gap liability that coincides with the first dose shift to our traditional Medicare patients. As of March 31, 2015, the specialty pharmacy channel held less than two weeks of inventory as calculated based on trailing demand. Fanapt U.S. net product sales reached $14.7 million in the first quarter since Vanda regained rights to commercialize Fanapt in the U.S. During the first and fourth quarters of 2014, Novartis recognized Fanapt U.S. net product sales for $16.9 million and $15.8 million, respectively. On a non-GAAP basis, during the first quarter of 2015, Vanda recorded non-GAAP operating expenses excluding cost of goods sold, stock-based compensation and intangible asset amortization of $21.3 million compared to $33.8 million during the first quarter of 2014. A new tangible asset was recorded in the first quarter of 2015 related to the $25 million milestone obligation to Bristol-Myers Squibb due upon cumulative global net product sales of HETLIOZ reaching $250 million. The HETLIOZ intangible asset and related amortization is recognized when reaching the $250 million cumulative amount is deemed probable while the actual payment will occur once the sales are realized. Amortization for the new HETLIOZ intangible asset for the first quarter of 2015 was $1.5 million in subsequent quarters through January 2033, will reflect amortization expense of approximately $300,000 each. Vanda's cash, cash equivalent and marketable securities as of March 31, 2015 increased by $4.5 million to $134.3 million compared to $129.8 million as of December 31, 2014. During the first quarter of 2015, Vanda's cash flow benefited from the timing of the initial Fanapt gross to net liabilities and the receipt of the final Fanapt royalty payment. Vanda affirms the 2015 financial guidance previously provided and expects to achieve the following financial objectives for 2015. Combined net product sales from both HETLIOZ and Fanapt of between $95 million and $110 million. HETLIOZ net product sales of between $40 million to $45 million and Fanapt net product sales of between $55 million and $65 million. Non-GAAP operating expenses, excluding cost of sales, of between $105 million and $120 million. Non-GAAP operating expenses exclude intangible asset amortization expense of $13 million and stock-based compensation of between $8.5 million and $10.5 million. With that, I'll turn the call back to Mihael.

[Mihael Polymeropoulos:]

Thank you very much Jim. At this time, we'll be happy to answer any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Joshua Schimmer from Piper Jaffray.

[Joshua Schimmer:]

Thanks for taking the questions. Just two quick ones, one, Mihael as you mentioned programs engaging patients in independent training facilities for the blind, can you elaborate on what those are and how do you identify them and how you ultimately access the patients there. And then the second question is, as you think about the European opportunity, how should we be thinking about an inflexion in spending to address the European market?

[Mihael Polymeropoulos:]

Thank you very much Josh. On the independent living facilities, we already know the majority of them and we have been able to survey them to identify number of patients in training and length of the program. So what it is that, these facilities help blind individuals learn skills that will help them with the usually newly acquired condition of blindness. And as such, they participate mostly on an inpatient facility for several weeks or months depending on the program and there will be several turnovers of these cohorts of patients in a given facility in a given year. So our approach is to work with the staff of these facilities and insert the educational process of Non-24 with the regular team. So what typically happens is, we visit these facilities, patients sign up for a lecture and information on Non-24 and as result of that, they decide to obtain to our engine. And from that, everything is the same as if we had started with the DTC, meaning that opt-ins will be engaged by the case management system and then based on their wishes, we will engage their physicians with the account managers closing that loop. So the number that we estimate over a 100 is a pretty firm number because we have done the service with these facilities and we know that at least several thousand people will rotate through these facilities in a given year. And what is exciting about this approach is that unlike DTC, which is a much broader umbrella of the general population, this is a very direct to likely patient activity and it is also grass roots because they are already connected in an environment with other blind individuals for the purpose of training. So this quarter, the sales force has been trained and we’re launching the program naturally [ph], and as I said earlier, aiming to optimize the activity.

[Joshua Schimmer:]

And then Europe Medicines?

[Mihael Polymeropoulos:]

Yes, for Europe, just for a background for everybody of course we received the CHMP positive opinion. We are very excited about that being on track for an EU approval sometime at the end of Q2, beginning Q3. Towards Europe, the activities that we believe are extremely important to prepare us for launch for this rare orphan disorder with very little awareness is strengthened the already existing relationships with blind advocacy organizations across Europe, and that is something that we have initiated last year and we will continue this year. The other activity is market access. As all of you know, the dossier [ph] investment environment is different than the US, fragmented but also very well prescribed. We have initiated this process several months ago and we are in the process of finalizing the dossier for the German authorities and the pharmacoeconomic analysis in dossier for the UK. So while we are undertaking these activities, we are aiming to have a small core group of people based in London to co-ordinate many of the necessary European activities. So as such you should not expand any significant spend this year, but as we progress and understand more, what will be the appropriate market and sales activities in Europe that could escalate. But of course we are going to be monitoring very carefully that opportunity.

[Joshua Schimmer:]

Great. And maybe one last quick question on the pruritus study. What changes are in this next Phase II that should increase probability of success?

[Mihael Polymeropoulos:]

There are two key design changes that are derived from the knowledge of the pharmacokinetic pharmacodynamic analysis and that is increase dose and deliver twice a day. And as you recall from our prior press release, we saw a significant effect, so the primary endpoint for those patients that at the time of evaluation through the vast scale of the pruritus score had higher amount of drug in their blood stem. So increasing the dose twice a day is a critical change from before.

[Joshua Schimmer:]

Got it. Thank you very much.

[Mihael Polymeropoulos:]

Sure.

[Operator:]

We have Jason Butler from JMP Securities online with the question.

[Jason Butler:]

Hi, thanks for taking the questions and congratulations on the quarter. First question, can you give us anymore color on the persistence rate for HETLIOZ or other metrics that can speak to your ultimate goal of a chronic therapy rate of 50% [ph] is that still your long-term goal for the drug?

[Mihael Polymeropoulos:]

Hi, thank you, Jason. Just to say, as we said in the prior quarter, we are moving away from the individual metrics we had provided before, but I can tell you that the goal of 50% chronicity for those when you say a treatment, remains the same and the data on bulk compliance and persistence point to confirm that number.

[Jason Butler:]

Okay, that's helpful. And then in terms of the net patient adds on active therapy, can you talk about what you saw in 1Q15 relative to what you saw in the second half of 2014, what you're seeing so far in the quarter and what we should think about when we look forward to 2015 relative to the fact that you just reaffirmed your guidance? Thanks.

[Mihael Polymeropoulos:]

Correct. So the important number here that we thought we would share is the 22% increase in patients on [ph] therapy at the end of the quarter as compared to the patients on therapy at the end of the prior quarter. And that is very important to us because it actually does increase our confidence in our financial guidance for the full year and while the beginning of the quarter was softer in January, we saw a significant pickup in March as well.

[Jason Butler:]

Okay, great. That's helpful. Last question for me, just an apology if you spoke about this more in the prepared comments, but can you talk about Smith-Magenis, and in terms of what you learned during the observational study and how that's helping you think about the interventional study that you're going to initiate later this year and how we might think about that commercial opportunity?

[Mihael Polymeropoulos:]

Yes. So on the first part, what we learned from the observational study, two key things. One is we confirmed that indeed there is the appearance of the inversion of the circadian rhythm with melatonin secreted during the day for an extended period of time, instead of the normal physiology of melatonin secretion at night. We also learned quite a bit about the clinical expression of the disorder by continuously monitoring through actigraphy and virus, the sleep and wake cycle of this individuals and this has allowed us now to define a primary endpoint measuring accurately a sleep difference from base line for the pivotal study. The study, we are actually in the final stages of design now, is a double-blind placebo-controlled study that will evaluate the efforts of tasimelteon in improving the sleep-wake cycle abnormality of this patient. Now, in terms of the opportunity, it is a rare orphan disorder that we have described the frequency before, but it's smaller opportunity than Non-24 in the totally blind, but unlike Non-24, where awareness was almost completely absent between patients and physicians, Smith-Magenis Syndrome has actually family organisation, we're working very closely with one of them prisms here in the US and hedge an international registry of more than 800 patients already identified and families engaged. So we are very, very encouraged by the presence of a specific for the disease advocacy organization, bring in Smith-Magenis more in line of what is known with other rare orphan disorders.

[Jason Butler:]

Okay, that's really helpful. Thank you for taking the question and congratulations on the quarter.

[Mihael Polymeropoulos:]

Thank you, Jason.

[Operator:]

We have a question from Ryan Martins from Jefferies.

[Ryan Martins:]

Thanks. Just wanted to ask on hernias on the call, it wasn't above new prescriptions written per month during the quarter pretty consistent with what you'd been seeing in 4Q, certainly about 70% to 80% prescriptions per month.

[Mihael Polymeropoulos:]

And again without saying the specific numbers, yes, it is true that the new prescription demand was relatively consistent.

[Ryan Martins:]

Okay. And maybe can you talk about jet lag and what are you trying to do with melatonin and jet lag, I think you have mentioned that as one of your lifecycle management activities?

[Mihael Polymeropoulos:]

Yeah. This is an obvious indication for a drug that has a circadian regulatory properties and as you most likely know there are millions of people that actually can be affected in a certain year by the symptoms of jet lag. Of course not everybody who travels crossing time zones will use the treatment, but few, especially frequent travelers will be interested in a solution. Now, even with a smaller number of business travelers and even with a small percentage of them being willing to be treated and being interested in treatment with jet lag makes this opportunity extremely interesting for us. First of all, from the technical point of view, you may recall we have already started in a Phase 2 and Phase 3 study in the model of jet lag successfully without publishing actual figures back in Lancet. So addressing that from the technical point of view, the technical risk is lower and then on the commercial opportunity, what is very interesting is that while it is a broader population indication it lends itself to be very well aligned with the pricing of HETLIOZ as an orphan drug in Non-24 given the temporary use of only a few days. I was just trying to close that. The immediate plan is finalizing the development plans, sit down with the FDA and discuss this and from there decide on timing extent of this program.

[Ryan Martins:]

Okay. Thank you. And then one final one was on the Fanapt. Obviously you have the trial date next year with Roxane, so the 638 and 776 patents are not included there. I mean is there potential for those to be included in that trial at some point or that's -- it's just too close to the trial date, there is no chance of that?

[Mihael Polymeropoulos:]

Yes, it is unlikely that any other patents will be included in the trial with 610 and the NCE are consolidated.

[Ryan Martins:]

Okay, thank you.

[Mihael Polymeropoulos:]

Sure.

[Operator:]

We have a question from Corey Davis from Canaccord Genuity.

[Corey Davis:]

Thanks very much. Can I take it from your comments about HETLIOZ and the EU that you've ruled out the use of a partner and then you do plan to do everything on your own?

[Mihael Polymeropoulos:]

Thanks for the question, Corey. Actually, no, we will not rely on a partner in the EU, but you should expect that some of the earlier activities at least advocacy, building a country specific market launch plans and market access will be activities that Vanda will undertake. And while we think that the indication does lend itself, Vanda thinking and planning to execute we are mindful that there could be good alternatives, partnerships in that scale as well.

[Corey Davis:]

Okay. And what level of investments are you willing to end [ph] right now putting behind Fanapt given that you can't be sure how long it's going to last beyond the composition patent expiration in 2016?

[MihaelPolymeropoulos:]

Yes, first of all, I would say we are very confident on our patent portfolio. Now, having said that we have always taken a measured approach on how we approach things both on the development and commercial setting. So you will not be surprised that while we just trained our sales force and our sales force is out talking to high prescribers, making sure they understand we are supporting the brand if we want their business and we want them to identify new patients to treat with Fanapt. At the same time, over the next few months, we will be launching a couple of pilot programs of better understanding and quantifying the promotional sensitivity and the effectiveness of our approach. So, we do plan to put appropriate resources but at this time only after we learned few more things.

[Corey Davis:]

Okay. And can you elaborate a little bit more, I wasn’t sure exactly or didn’t hear exactly what you were saying about your plans for the once monthly injection on Fanapt?

[Mihael Polymeropoulos:]

Thank you for this question. So, just as a background as some may not know, haloperidol is a drug that has been formulated as a once a month injectable. Novartis did run a Phase II study trying to understand the pharmacokinetics and also the tolerability of a once a month formulation and confirmed the over a month release of the drug and the good tolerability profile. So, we’re now in the final stages of selecting the formulation and doing the final designs on the development pack. There is a lot of experience at the FDA with depot long-term injectable formulations and we understand that it is very likely that one single large Phase III efficacy study will suffice. The interesting opportunity around depot formulation is unlike oral formulations, depot formulations can be used as a follow-up compliance and maintenance tool for patients who are on different oral formulations for which perhaps a long-term formulation does not exist. Actually only a few have been able to formulate long-term injectables. And what we see in the market dynamic now, there is a lot of interest in the psychiatric community in using effective long-term injectables and so, we believe that the market opportunity is significant as well.

[Corey Davis:]

And how soon do you think you’d be able to start that Phase III, it’s like end of this year?

[Mihael Polymeropoulos:]

I cannot commit to a timeline but it would be more towards end or next year.

[Corey Davis:]

Okay. And I believe that’s all I have for you. Thank you.

[Mihael Polymeropoulos:]

Thanks, Corey.

[Operator:]

We have a question from Stefan Quenneville from Morningstar.

[Stefan Quenneville:]

Yeah, hi, thanks for taking my call. My first question is about HETLIOZ pricing in Europe. I actually want to get a sense of how we should think about that relative to the US price, given the sort of dynamics there? Second is just sort of a follow-up on your Fanapt’s injectable. You said you need to do a large Phase III, can you just talk about the number of patients you’ll be looking at and possibly the length of that trial? And then, I guess finally on the jet lag indication, is that something you would look to market yourself or potentially partner given the -- I imagine the broad potential market for that? So, just curious how -- if I’d work, how you’d want to talk it to market? Thanks.

[Mihael Polymeropoulos:]

Sure. Thanks, Stefan. On your first question on pricing in Europe, we have not set pricing. We did our internal discussions and thoughts and I would say the key word here will be consistent with the US price. We believe consistent level of pricing will be appropriate and also consistent with other orphan drugs and the European pricing. Your second question on the depot, I cannot offer much detail yet as we are in the climbing [ph] phase, but I would say, in general, several hundred individuals will participate in that study. And these studies typically are over the length of six months or so. And your third question on jet lag and commercial outlook, I would say for now, Vanda would think that this is a very appropriate indication for us to commercialize and while it adheres to broad market, it is not necessarily a primary care doctor promotion. What is amazing about this indication is that the Department of Transportation has done a lot of homework over the years for us with very detailed analysis of the airports, the planes, the timing, where are passenger seats, their demographics, their self-habits, incomes et cetera. So there is so much market research and precision in marketing that while it is early to commit one way or the other, I would say, it would be compatible with Vanda commercialize in that space.

[Stefan Quenneville:]

Do you have an order of magnitude, I mean, obviously you’re still in the early stages, what would the market size or something like that be? Just seems like – obviously there is a lot of people, but realistically how addressable is that market?

[Mihael Polymeropoulos:]

I cannot give you a market opportunity size, but I can say, we view some key numbers from the Department of Transportation. There are 26 million Americans travelling from US to Europe every year and it is expected that about 10% of them or 2.6 million people are business travelers. So one could start thinking about a permutation [ph] number into primarily that 10% of business travelers, and for now I would leave it to that.

[Stefan Quenneville:]

Okay, great. Thanks.

[Mihael Polymeropoulos:]

All right. Thank you very much.

[Operator:]

Thank you, ladies and gentlemen. With this, we conclude today’s conference. We thank you for participating. You may now disconnect.