Vanda Pharmaceuticals Inc.
Q1 2014 Earnings Call Transcript

Published: 8 May 2014

[Operator:]

Welcome to the First Quarter 2014 Vanda Pharmaceuticals Earnings Conference Call. My name is Larissa, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the call over to Jim Kelly, Senior Vice President and Chief Financial Officer. Mr. Kelly, you may begin.

[James Patrick Kelly:]

Thank you, Larissa. Good morning, and thank you for joining us to discuss Vanda Pharmaceuticals' first quarter 2014 performance. Our first quarter 2014 results were released this morning and are available on the SEC EDGAR system and on our website, www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our website. Joining me on today's call is Dr. Mihael Polymeropoulos, our President and CEO. 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 of 2014 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 MD&A sections of financial condition and results of operations sections of our annual report on Form 10-K for the fiscal year ended December 31, 2013, which is 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'd now like to turn the call over to our CEO, Dr. Mihael Polymeropoulos.

[Mihael H. Polymeropoulos:]

Thank you very much, Jim. Good morning, everyone. I will first discuss the commercial launch of HETLIOZ for the treatment of Non-24. To remind you, Non-24 is a rare orphan disorder affecting primarily totally blind individuals with a prevalence of approximately 80,000 in the U.S. and many more worldwide. Non-24 expresses itself as a cyclical Sleep-Wake Disorder, which significantly impacts the social and occupational functioning of affected individuals. For many totally blind individuals, it is the symptoms of Non-24 and not the blindness that stand in their way of fully participating in the 24-hour society. HETLIOZ received U.S. market approval by the FDA on January 31, and it is the first treatment that was approved to treat Non-24. Blind advocacy organizations were critical in this successful endeavor, and the interactions with them has allowed Vanda to better understand the determination, bravery and commitment of this amazing community in overcoming hurdles. Vanda is proud and privileged to collaborate with the blind community in bringing HETLIOZ to the assistance of people who need it. Over the years, working on Non-24, Vanda also realized that low awareness of the disorder among the patient and the physician community will be a significant hurdle that would need to be addressed for successful commercialization of HETLIOZ. Towards that goal, Vanda has devoted significant resources to increase awareness for Non-24. Our early work, which includes significant interactions with the patient and physician community and a pilot awareness campaign has informed our long [ph] strategy, which I would like to characterize in more detail. Blind individuals with Non-24, as members of our broad society, have the same aspirations, dreams, successes and failures as their sighted counterparts and seek and receive information through the diverse channels of communication that include radio, television, the Internet and the written press. Vanda is using all these media to create awareness around Non-24. Radio and television have been the most successful in creating awareness and allowing the measurement of the impact of such awareness in directly engaging with the patient community. During the first quarter of 2014, we launched a national radio awareness campaign that has effectively reached not just the blind community but more than 60% of the U.S. population. Such broad awareness has placed Non-24 and blindness in the vocabulary of many average individuals, but most importantly, has piqued the interest of likely patients and their friends and families, as well as the physician community. Thanks to this national radio campaign, Non-24 is no longer the obscure condition that it was just a few months ago, and the broad community at large has made the connection between inability to perceive light and the sleep and wake symptoms of Non-24. There is also this awareness campaign where thousands of calls to our call centers staffed by health educators, and more importantly, thousands of individuals that shared their contact information and opted in to continue to receive information on Non-24 and potential treatment. In addition to our radio campaign, we also piloted a TV Non-24 awareness campaign, which was met with similar success. We're currently running a national TV campaign across the United States. The combined results of our radio, TV and Internet campaigns are very encouraging. To date, over 7,000 individuals have opted in to receive more information on Non-24 and its treatment. We have carefully assessed these campaigns, and we can conclude that the response rates continue to be linear and directly proportional to the amount of resources that we devote towards these campaigns. This would suggest that although we have made contact with over 7,000 likely patients, friends and family, there are still many more to be identified, which is consistent with the epidemiological evidence which suggests the prevalence of 80,000 in the U.S. While this is encouraging, we want to caution that there is significant amount of work to be done in order to further identify those individuals who will seek medical diagnosis, and when appropriate, treatment. To that effect, Vanda had recognized very early that identifying the correct physician group for targeted awareness is also of paramount importance in successfully commercializing HETLIOZ. Through pilot programs with many likely Non-24 patients who have opted in, in our database, we recognize that a Patient Directed Physician, or PDP, target approach is the most immediately effective way to identify likely prescribers, and therefore, focus our early sales force targeting efforts. By focusing our time with the validated physicians, with likely Non-24 patients, we can better prepare the market to facilitate patient diagnosis and treatment. We have now begun an effort to identify a specific PDP, Patient Directed Physician, each associated with one of our opt-in self-identified likely patients to call upon and prepare them with information on Non-24 and HETLIOZ. This effort is through our case management service and involves a continuous relationship with our engaged likely Non-24 patients. Per the direction of our opt-in patients, our field force has now begun calling upon and creating awareness among these specific PDP targets. We're now in our third week of our U.S. launch, and our field force has called upon approximately 500 PDP targets. The majority of these targets are primary care physicians who have established relationships with these patients and are very willing to help their patients be evaluated for Non-24 and be treated with HETLIOZ when appropriate. While this is a very labor-intensive process, it forges strong relationships with the patients and the physicians and is likely to produce best outcomes for our patients. While the PDP target project is a first priority for Vanda during these early days of our launch, our field force is also establishing relationships with sleep specialists that could be involved in the treatment of patients with Non-24. On the payer front, our corporate accounts team is working with a full range of national, regional and local payers to establish reimbursement for HETLIOZ. This process will likely take 3 to 6 months to materially be completed. Our early experience makes us believe that HETLIOZ will be broadly available, likely with a prior authorization requirement for blindness, as we had expected. In summary, we're encouraged by our awareness campaign, the early reception by physicians and payers, but we also recognize the significant efforts and resources which need to be devoted in order to make this great treatment a great commercial success as well. I will now turn briefly on an update on our pipeline. On tasimelteon, we're progressing with our EMA European submission, where we expect successful filing later this year. We're also making progress in developing protocols for our pediatric Non-24 indication, as well as working towards an observational study for Smith-Magenis syndrome. On VLY-686, our Phase II NK1 antagonist, in this study with patients with chronic pruritus in the setting of atopic dermatitis, we continue to enroll, and we expect to complete enrollment later this year. With that, I will turn it back to Jim.

[James Patrick Kelly:]

Thank you, Mihael. Before continuing with the detailed results, I'd like to highlight a few accounting items for the quarter. The first quarter 2014 financial results include $10 million for milestone payments associated with the FDA approval of HETLIOZ in the U.S. A $2 million regulatory consultant milestone payment was expensed to R&D, and an $8 million milestone payment was made to Bristol-Myers Squibb which is treated as an intangible asset. This $8 million intangible asset will be amortized over the expected life of HETLIOZ in the U.S., which is December 2022 or approximately 9 years. The second item is the election made to change our accounting method for stock options from the accelerated method of amortization to straight line method of amortization, effective January 1, 2014. We made this change to better align with our peer group. Prior periods will reflect the change on a retrospective basis. Please see Footnote 3 from our Form 10-Q filed this morning for a detailed bridge of the impact of this change on Q1 '13 financials. The final item is a revision to our estimated useful life of Fanapt in the U.S. During the first quarter of 2014, we became aware that it's not likely that Novartis would complete a pediatric study in time to qualify for a 6-month extension of exclusivity. As such, we will prospectively adjust the amortization of both the Fanapt intangible asset and the Fanapt licensing revenue over the shorter remaining period. During the first quarter of 2014, Vanda recorded a net loss of $26.5 million as compared to a net loss of $4.5 million in the first quarter of 2013. On a diluted shares basis, this reflects a loss of $0.79 per share for the first quarter of '14 as compared to a net loss per share of $0.16 from the prior year. As of March 31, 2014, there were approximately 33.9 million shares of Vanda common stock outstanding. Total revenues for the first quarter of 2014 were $9.1 million as compared to $8.1 million for the first quarter of 2013. In these periods, there were 2 sources of revenue. They are licensing revenue and royalty income each associated with Fanapt. First quarter 2014 licensing revenue was $7.5 million as compared to $6.6 million during the first quarter of 2013. This higher amortization amount in the first quarter of 2014 resulted from the previously mentioned shortening of the expected life for Fanapt in the U.S. During each period, Vanda recognized a 10% royalty on Novartis net sales for Fanapt. First quarter 2014 Fanapt royalties received from Novartis were $1.7 million compared to $1.5 million in the first quarter of 2013. Total operating expenses for the first quarter of 2014 were $35.7 million compared to $12.6 million in the first quarter of 2013. General and administrative costs of $27.9 million made up the majority of the first quarter 2014 spend and reflected the increase in commercial activity in preparation for the launch of HETLIOZ in the U.S. During the first quarter of 2014, we brought on board our full field sales, national accounts and medical affairs team. The single biggest G&A item for the first quarter of 2014 were the media costs associated with the Non-24 Disease Awareness campaign. Research and development costs for the first quarter of 2014 were $7.3 million and included a $2 million milestone payment associated with the HETLIOZ approval in the U.S. Excluding this onetime item, first quarter research and development expenses were 34% lower than prior year. Cash, cash equivalents and marketable securities, which I'll refer to as cash, as of March 31, 2014, totaled $100.4 million. Cash decreased by $29.9 million in the first quarter of 2014 compared to decreases of $9.5 million in the first quarter of 2013 and $11.8 million in the fourth quarter of 2013. Vanda is providing investors with the following financial guidance for the full year 2014. Total operating expenses are expected to be between $110 million and $120 million. This includes intangible asset amortization of $2.5 million and between $6 million and $8 million of noncash stock-based compensation. Total 2013 operating expenses were $54.3 million. For the full year 2014, expenses are expected to reflect lower research and development spending as compared to 2013 and an increase in commercial spending to support the commercial launch of HETLIOZ in the U.S. I will now turn the call back to Mihael.

[Mihael H. Polymeropoulos:]

Thank you, Jim. At this time, I will be happy to address any questions you may have.

[Operator:]

[Operator Instructions] The first question comes from Jason Butler from JMP Securities.

[Jason N. Butler:]

So first question, could you give us an indication either quantitatively or qualitatively as to whether you actually have -- whether there are patients receiving prescriptions today and actually patients receiving drug commercially?

[Mihael H. Polymeropoulos:]

Yes. So quantitatively, we're not going to give any numbers of prescriptions written or patients on treatment. It is very early, and hopefully in the future, we'll be able to discuss in very good detail. Now also, I want to remind everybody that the prescriptions go through specialty pharmacies, so they are invisible to the regular channels like IMS. To answer qualitatively your question, Jason, is yes, there are patients on commercial treatment. And we've made a significant progress in converting or in the process of converting our clinical patients from the ongoing clinical study to commercial product. So both clinical to commercial conversion is going on, and commercial patients first time on HETLIOZ are actually coming in [indiscernible].

[Jason N. Butler:]

Okay, can you just sort of remind us, Mihael, how many patients you had in the clinical studies and extension studies that you'd view as potentially low-hanging fruit to convert in this -- early in this process?

[Mihael H. Polymeropoulos:]

Yes. In totality in the U.S., there were about 70 patients in the extensions on treatment on HETLIOZ, and we're making every effort to offer treatment to the majority or all of them.

[Jason N. Butler:]

Okay. And then just I wanted to follow up with some clarity on the reimbursement process. You said 3 to 6 months to move through the process. Does that mean that none of the patients today on drug are being reimbursed? Or have you had early successes and you're getting reimbursement payments already?

[Mihael H. Polymeropoulos:]

Right. So let me be more elaborate on this. Three to 6 months is a typical process that our corporate accounts will meet and go through the initial round of discussions with most or all the clients. This process typically will take up to 9 to 12 months for every fund to make formulary decisions. So let me explain how it works in the first days. Scripts are written. They come into the hub services. They get triaged to the specialty pharmacy and insurance verifications are ongoing. So payers get notified of the script. Of course, they don't have HETLIOZ in the formulary yet. A discussion happens with the corporate account managers, and typically, the funds with the payers will request a prior authorization form to be filled out by the physician. That prior authorization form is a certification on blindness. With that in starts the second round of discussions with the payers, and typically, that is sufficient on a temporary basis to approve the script and triage it to the specialty pharmacy. Now in some circumstances, medical -- letter of medical necessity would need to be filled out, and once filled, that allows, again, the processing through the payers. So for now, it's very early. The -- we have not seen a complete hold or stop or block by a payer. What we have seen is a fully expected process of it's not in the formulary yet, here is my prior authorization requirement, signed, get in, I allow the drug now to move on to the specialty pharmacy. But again, I caution everybody that we have to go through the full cycle and understand the unformulary/formulary [ph] position, et cetera. It is important to point out that we facilitate all the process through HETLIOZSolutions. HETLIOZSolutions has a dual function, both education awareness and facilitation of patient contact but also the processing of the intake forms, the scripts, as they come in into the hub. And that includes insurance verification. It includes, when appropriate, co-pay support, when appropriate, foundation support for those patients that require it, and of course, the discussions with the specialty pharmacy, and it triggers the process that we were discussing with the payers. So to date, no red flag in this early days with any of the payers.

[Jason N. Butler:]

Great. And just to confirm, that process you just reviewed, the temporary approval process, is that something that takes days, weeks? Is that something that's already happened for multiple patients?

[Mihael H. Polymeropoulos:]

Yes, it's something that is going on, and it does take some time. But it is early, and we hope that all this process will become optimized. One key part is looping in back to doctors filling the forms and faxing the prior authorization form. But we will be becoming efficient as time progresses. At the beginning, we'll take more time, and as we have gone through this process with the payer once or twice, then things are expected to be a lot smoother.

[Operator:]

The next question comes from Kristina Cibor from Piper Jaffray.

[Kristina N. Cibor:]

Just a couple of quick questions. So as the radio ads and TV ads now switch to branded awareness, is -- are you seeing the rate of new patient identification being sustained?

[Mihael H. Polymeropoulos:]

Yes. Just to clarify, the majority of our awareness campaign to date is a Non-24 awareness campaign. We do have a branded awareness campaign on HETLIOZ, and we find that this is more useful to activate patients that have already opted in the database, and they're coming back to find out how to get hold of HETLIOZ, how to access it, and also new patients. But the majority of our efforts in awareness is continuously identifying new patients. And to that effect, I think it's very important to point out that what impresses us the most is that the continuous awareness campaign has not reached a saturation point. And that is we do see a direct proportional relationship between the level of awareness and number of patients who opt in, in the database. And this is even more explicit. We've done several valid experiments with that where we either increased the resources and awareness of a week period of time or decreased the awareness. And proportionately and immediately to the increase or decrease of the awareness campaign resources, we see a proportional increase or decrease of the opt-ins. What's very interesting also is we have begun now a new wave of national TV awareness. And again, we can absolutely predict the rate of opt-ins based on the population reach and frequency and the gross rating point on TV advertisement that we buy, suggesting again that with these very detailed metrics, we're still in the linear phase of opt-in acquisition. And of course, just to caution everybody, we're talking about big numbers. But not everybody will go to treatment. Not everybody will get a script, and none of them will do this immediately. So it requires a lot of patience [ph], and there's a lot of hard work to move patients from the awareness phase to successful treatment.

[Kristina N. Cibor:]

Okay. And then of 7,000 that have opted in to receive more information on HETLIOZ, is -- so I noticed in the release, it says that it was -- some were patients, others were friends and family of blind individuals. Is it more heavily skewed towards blind individuals, or is it -- so what's the proportion between those...

[Mihael H. Polymeropoulos:]

I'll give you the exact breakdown. So out of the 7,000, about 60% are self-identified totally blind patients that are likely having Non-24. 20% identified themselves as friends and family of blind individuals with Non-24, and about 20% is a catch-all other category, either they didn't specify or they are truly others like rehabilitation service specialists, physicians, et cetera.

[Kristina N. Cibor:]

Okay, that's helpful. And just last question, I know you said that you've been primarily reaching out to primary care physicians versus sleep specialists in the campaign. But is there a percentage of -- do you have a kind of breakdown of the primary care versus specialists? And do you find these primary care physicians are comfortable writing and getting prior authorization for HETLIOZ?

[Mihael H. Polymeropoulos:]

Yes, thank you very much for that. So the vast majority, and I would say of the 500 patients, about 80% or so are primary care and the 20% are other. And it doesn't mean sleep specialist. It means other nonprimary care physicians that a patient has developed some trust and they want to us to talk to. So more than 80% are primary care. To your question of their level of comfort, we see, actually, a very good reception to do both

[Kristina N. Cibor:]

Perfect. I do have one last question, and it's just on the SG&A sense. I know you said it will increase this year for the launch. But do you see that -- so is it basically you're building up these resources to identify these patients, but would you see it after that point declining, or is it something that, it's more of a continuous effort on your end to be fully engaged with these individuals?

[Mihael H. Polymeropoulos:]

Yes. That's a very fair question, and I would say it is very early to commit exactly what the spend should be. So let's talk about the 2 buckets that we see of activities. It's the resource-intensive bucket of creating leads, the awareness campaign with the opt-in. And that, as you expect, and it reflects in our first quarter spend. It's a very significant cash resource. But the second bucket is the throughput. So once you have identified opt-in patients, how do you move them along the journey from awareness to treatment if and when they need the treatment. In fact, it's very human resource labor-intensive but not as cash resource expensive as the direct-to-consumer advertising campaign. So having said that, most probably, we will be focusing as we are now on the throughput but being very mindful also not to shortchange the awareness campaign. And it is very important that we understand the return on investment and relative return on investment. So one can calculate very quickly now, we can, the return on investment on having an awareness DTC campaign in creating opt-ins. The more important number is the spend over scripts written, or more importantly, over patients successfully treated on chronic therapy. And that will take several months to know. So in these early days of ambiguity of what this conversion factor will be, because it takes time for people to go to doctors, make these appointments and eventually come to treatment and successful treatment, you will see us have a balanced approach where the campaign may continue in some positive [ph] version and summer is usually not a great time to do TV and radio advertisement but actually focus ourselves to the very labor-intensive improving efficiency of throughput approach. So I know this does not fully answer your question but expect the mixture but expect a heavy emphasis on throughput versus DTC.

[Operator:]

The next question comes from Stefan Quenneville from Morningstar.

[Stefan Quenneville:]

I guess it's sort of a 2 parter. The first question is can you give us some insight onto what portion of your SG&A is going towards this awareness campaign just so I have a sense of order of magnitude? And secondly, now that you've started your launch in the U.S. and you're getting a sense of what's working or what's not, can you let me know how you're thinking about going after the European market once you get approval there?

[Mihael H. Polymeropoulos:]

Yes. I'll take the second part of the question. Jim, on the first?

[James Patrick Kelly:]

Yes. So here's how I'd characterize the SG&A change from prior year. We expect, if you look at the field force plus internal updates, that the total headcount of the company will move from, call it, 53 at year end to a number that's closer to 100 at year-end 2014. So we're talking about approximately 50 people added. Multiply that by your favorite FTE rate, and you kind of get a sense of the cost structure change. Then you layer on top of that just sort of your core marketing, and as Mihael has put it, throughput and hub services. What -- without giving you the direct answer, the way we're characterizing it is that the awareness spend is the single biggest G&A line item for the first quarter. And as I think he appropriately described it, it's continuing through the second quarter, and then we're going to monitor exactly where we want to go from there with the recognition that perhaps summertime isn't the best time to be out there doing that. So without giving you too much more granularity, I think that, that helps you back into our cost structure.

[Mihael H. Polymeropoulos:]

Okay. On the EU question, the question was what have we learned, good and bad, that we can apply in Europe. First of all, Europe is a case study on the commercialization front of a rare orphan disorder with no prior treatment on itself. So we do not want to underestimate how different and potentially very challenging it can be. But we've learned a few things over the years that we're beginning to apply in Europe. What we learned is you need to work with blind advocacy organizations. It's not good enough to have a treatment that works on the science front and the regulators approve it. You need to have the people who will actually use it, who want it and be supportive and tell others in their community. So the blind organizations in Europe are strong, are diverse. They have different structures than the U.S. organizations, but they're also very well aligned to our friends here in the U.S. We are extremely pleased and happy that our U.S. partners in the blind advocacy organizations have begun introducing us to the worldwide leaders of the blind advocacy community, and we are now beginning the process of establishing these relationships. So that is number one and I think the most important driver for success with commercialization in the EU. The second one is developing the relationships with the local key opinion leaders who will help us both with the regulatory process but also through the very elaborate discussions on pricing and reimbursement. And the third is to fully understand patient-physician flow in individual major countries, which will be, by definition, different than it is in the U.S. In the U.S., we think we have identified a unique way to identify patient-physician flow with the PDP approach, the Patient Directed Physician targets. This may or may not work in Europe. And based on the individual relationships and attitudes in the individual countries, we will develop our tactics.

[Operator:]

The next question comes from Jason Butler from JMP Securities.

[Jason N. Butler:]

Just one question on the 500 physicians. Can you give us a sense of what proportion of those physicians would treat a larger number of patients and maybe consider specialists first even within the primary care setting versus those that have maybe a small handful, a small number of patients?

[Mihael H. Polymeropoulos:]

Jason, that is a great question that, of course, [indiscernible] because it makes the process even more efficient. Very early days but what we hear anecdotally from the physicians themselves when we approach them, and as I explained, our account managers do not have the names of patients. So we described an interested patient of that physician that is totally blind individual with sleep-wake problems that are interested to be evaluated for Non-24. The physicians then are trying to find through their memory and charts who could that be. They usually refer to 2 or 3 individuals that meet that profile. So I would say as a broad stroke expectation, we would expect that 2 or 3 individuals could fit that profile. So for all purposes, the process of PDP will be profiled [ph], single accounts [ph], single patient-physician pairs identified through our PDP process.

[Jason N. Butler:]

Okay, great. That's very helpful. And then just a question on the pipeline, and I'm sorry if I missed this earlier. But can you talk about the plans for additional indications, specifically Smith-Magenis syndrome? And if that is an indication that you're going to pursue clinical development for, do you need to start or complete any pediatric work for tasimelteon in the currently approved Non-24 indication first?

[Mihael H. Polymeropoulos:]

Right. So the simple answer is no, but let me explain. So we are in parallel progressing and developing a formulation that will be compatible for use for both in pediatric Non-24 application and Smith-Magenis syndrome. We're developing now protocols for the pediatric Non-24. So you can imagine these protocols typically include pharmacokinetic studies but also the necessary efficacy and safety studies, and that plan, we'll discuss with the FDA as we have begun discussing with our European regulators. Now in parallel, we have started the work on Smith-Magenis. The first protocol there is an observational study, trying to better understand what is the true circadian underlying abnormality and what are the key symptoms that we should try to address. And we expect that this observational study will begin sometime this year. So following that, it will be, if we're successful identifying what symptoms we could perhaps see [ph] with HETLIOZ, there will be an efficacy study. So the answer to your question is, there is not a requirement that we have a completed pediatric program before we move to Smith-Magenis.

[Operator:]

I'll now turn the call over to Dr. Polymeropoulos for final remarks.

[Mihael H. Polymeropoulos:]

Well, thank you very much for your interest in Vanda and your great questions, and we'll talk to you soon. Thank you.

[Operator:]

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