VNDA (2020 - Q3)

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Vanda Pharmaceuticals Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker for today, Vanda's Senior Vice President and Chief Financial Officer, Mr. Kevin Moran. Please go ahead, sir. Kevin Mo

Thank you, Illac. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals' third quarter 2020 performance. Our third quarter 2020 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. Mihales Polymeropoulos, our President and CEO. Following my introductory remarks, Mihales will update you on our ongoing activities. I will then 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 upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in the cautionary note regarding forward-looking statements, 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, 2019, as updated by our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC, which are available on the SEC's EDGAR system and on our website. We encourage all investors to read these reports and our other SEC filings. The information we provide on this call is provided only as of today, and we undertake no obligation to update or revise publicly any forward-looking statements we may make on this call on account of new information, future events or otherwise, except as required by law. With that said, I would now like to turn the call over to our CEO, Dr. Mihales Polymeropoulos.

Thank you very much, Kevin. Good afternoon, everyone. The third quarter has been an outstanding quarter, despite the pandemic disruption, which peaked in the late spring. The late spring disruption did affect demand for both HETLIOZ and Fanapt as measured by new scripts for each of the products. Given the several week delay from the time the script is written to time to fill for HETLIOZ, the late spring impact on HETLIOZ demand translated to fewer starts in the third quarter. Despite that, and given the continued strong adherence, HETLIOZ revenue was minimally impacted. Our sales force returned to the field in the summer and has effectively navigated local medical office closures and implemented telemedicine approaches. Since late August, we have seen a significant increase in new HETLIOZ scripts, with total new scripts in September reaching all-time highs. This trend has continued in October, and we estimate, again, another record high for new HETLIOZ script generation in this month. Despite the expected payer hurdles, we remain optimistic that this demand will translate soon to revenue and fuel HETLIOZ growth in the fourth quarter and lead us with a positive momentum in 2021. The HETLIOZ new script volume comes from both blind and sighted Non-24 individuals, with the larger portion of these new prescriptions involving the sighted Non-24 population. On Fanapt, Fanapt's revenue in the third quarter was relatively flat compared to the second quarter. Early in the summer, we launched a direct-to-consumer campaign with national television advertisement. While it is early in the campaign, the lead indicators of website visits and searches saw significant increase as compared to before the initiation of the campaign. Qualitatively, the campaign has initiated a national dialogue on schizophrenia aimed at reducing stigma for this devastating illness. In parallel, awareness for our Fanapt brand is entering the national state and is being inserted into the vocabulary of the U.S. population. We remain optimistic that awareness will lead to new starts that will hopefully translate to an increase in the number of patients on treatment. While we continue the marketing sales efforts aimed at growing our commercial revenue, we're also focused on our research and development pipeline on both the already commercialized as well as our pre-commercial pipeline products. The FDA review of our application in Smith-Magenis Syndrome for tasimelteon is ongoing. The FDA has granted priority review for this orphan indication and has set a PDUFA action date in early December. The FDA is evaluating our applications for 2 formulations of tasimelteon in SMS, the capsule formulation for adults, and the liquid formulation for children. Smith-Magenis Syndrome is a new developmental disorder caused by a genetic mutation of chromosome 17, which is a microdeletion in 90% of the patients and a point mutation in the RAI gene, which is included in the microdeletion region in the remaining 10% of the patients. The most common and most disruptive clinical expression of the disorder is a sleep disorder that impacts the function of patients and, consequently, their families. There is no approved effective treatment for these patients. Vanda has been working over the years in collaboration with a patient advocacy organization, PRISMS, to develop HETLIOZ for SMS and bring it to patients. We plan to continue our collaboration and expand our efforts to increase awareness of the disorder and, once approved, the product for the broader SMS patient population. SMS patients receive their diagnosis through a small number of specialized genetic labs. Vanda has and will continue to establish relationships with all of this context across the spectrum of the diagnostic and therapeutic patient journey. Vanda is well positioned with the existing know-how and existing sales force personnel to support the marketing sales of HETLIOZ in SMS. SMS affects 1 in 20,000 births, with an estimated U.S. prevalence of approximately 15,000 patients. Approximately 200 of them have already participated in Vanda's SMS registry, and hundreds are associated with the PRISMS advocacy organization. While thousands of patients are already diagnosed with DNA tests, many more remain undiagnosed. Vanda plans to establish a program and a network that will assist in improving awareness for SMS, while enhancing and accelerating diagnostics. We're eager to receive FDA marketing authorization and bring this important product to patients with SMS and their families as soon as possible. On tradipitant, the pivotal Phase III study in gastroparesis has reached the milestone of more than 50% enrollment for the study. As we have previously communicated, we believe the current Phase III study can be the last efficacy study required for NDA filing. With enrollment estimated to be complete in the first half of 2021, we expect an NDA filing for gastroparesis later in 2021. A partial clinical hold for studies longer than 3 months prevent us from collecting patient safety data for longer than 3 months, which may affect the NDA filing. The estimated prevalence of gastroparesis in the U.S. is over 5 million patients, the majority of which remain undiagnosed. The only FDA-approved treatment for gastroparesis is metoclopramide, first approved in 1979, which, due to its potential of severe side effects, carries a black box warning and limitations of use of no more than 3 months. Based on IQVIA data, there are over 3 million prescriptions of oral metoclopramide annually. Given the highly limited treatment options and the safety and tolerability profile of metoclopramide, we believe that a new therapy could achieve significant market share and can represent $1 billion peak revenue opportunity for Vanda. Other Phase III/IIb programs in motion sickness and atopic dermatitis have paused new randomizations until deemed safe enough to continue clinical studies given the COVID-19 pandemic. In August, we announced the results of the interim analysis from the ODYSSEY study with tradipitant in patients with COVID-19 pneumonia, which showed tradipitant may accelerate clinical improvement in patients with COVID-19 pneumonia. This early analysis suggests that tradipitant may act by accelerating the time to clinical improvement for patients with severe COVID-19 pneumonia. If confirmed, this effect may be of significant clinical benefit for patients as well as for public health by decreasing the amount of resource employed in the treatment of patients with severe COVID-19 pneumonia. Although preliminary, these interim results are in. A larger sample size will be required to definitively determine whether tradipitant offers therapeutic benefit in hospitalized patients with COVID-19 pneumonia by accelerating time to clinical improvement. The results from this interim analysis will be submitted for publication in the peer review journal. Additional clinical programs for HETLIOZ in delayed sleep phase disorder and insomnia in autism spectrum disorder are in the final stages of planning before beginning their respective Phase III programs early next year. Clinical development programs for Fanapt, including bipolar disorder, Parkinson's disease psychosis and the long-acting injectable formulation in schizophrenia are also in various stages of preparation. This week, we announced that the FDA has approved the investigational new drug application to evaluate Cystic Fibrosis Transmembrane Conductance Regulator, CFTR, activator, VSJ-110, for the treatment of allergic conjunctivitis. This approval marks the beginning of Vanda's development of therapeutics in ophthalmology by exploring the compound's dual anti-inflammatory and prosecretory mechanism of action. The initial Phase II study will evaluate the acute antiinflammatory effects of VSJ-110 in an ocular allergic challenge model and will evaluate the prosecretory effects using standard ocular fluid assessments. The results from this Phase III study will help guide further development of VSJ-110 to treat a variety of ocular inflammatory conditions, including dry eye disorder. Dry eye disorders are a major health care burden, with an estimated worldwide prevalence of 5% to 20%. About 60 million are reported to be affected in the United States, and more than 10% of people older than 50 years old are affected. While heterogenous by etiology, dry eye disease presents with common clinical signs and symptoms, which include corneal epithelial injury, decreased ocular fluid and clear breakup time and patient-reported symptoms of ocular discomfort or functional impairment in a low humidity environment. Treatment options available in the United States at present include artificial tears, punctal plugs and the topical antiinflammatory drugs, cyclosporine and lifitegrast. Despite available options, and even with the successes of RESTASIS and Xiidra brand names, dry eye disease is increasing in incidence and remains an unmet medical need. Other relevant indications include chronic inflammatory conditions, such as internal conjunctivitis, which remain fully addressed with current treatment options. To conclude, we're optimistic about the growth prospects of our commercial products, HETLIOZ and Fanapt, as we enter the fourth quarter and look for positive momentum into the next year. We look forward advancing all our pipeline programs, and we're particularly looking forward to the FDA decision on our SMS applications in December. And beyond that, we're excited for the completion of the gastroparesis program and NDA filing in 2021. I will now turn the call back to Kevin to discuss our financial results for the quarter. And after that, I will be happy to address any questions you may have. Kevin?

Thank you, Mihales. I'll begin by summarizing our financial results for the first 9 months of 2020 before turning to discuss the third quarter of 2020. Total revenues for the first 9 months of 2020 were $180.5 million, a 9% increase, compared to $166.3 million for the same period in 2019. HETLIOZ net product sales of $116.5 million were the primary contributor and driver of our revenues for the first 9 months of 2020 and saw a 12% growth compared to the same period in 2019. Fanapt net product sales of $64 million for the first 9 months of 2020 reflects 3% growth compared to the same period in 2019. For the first 9 months of 2020, Vanda recorded net income of $15.1 million compared to net income of $111.3 million for the same period in 2019. Net income for the first 9 months of 2020 included an income tax provision of $5.6 million as compared to an income tax benefit of $88.1 million in the same period in 2019. As a reminder, the income tax benefit of $88.1 million reflected in the financial results for the first 9 months of 2019 includes the favorable impact of the release of Vanda's deferred tax asset valuation allowance, which occurred in the third quarter of 2019. Vanda's cash, cash equivalents and marketable securities, referred to as cash, as of September 30, 2020, were $348.5 million, representing an increase of $48.9 million to cash as compared to September 30, 2019. Turning now to our quarterly results. Total revenues for the third quarter of 2020 were $60.3 million, a 1% increase compared to $59.5 million for the third quarter of 2019. HETLIOZ net product sales were $39.6 million for the third quarter of 2020, a 5% increase compared to $37.6 million in the third quarter of 2019. The year-over-year growth of the HETLIOZ business was driven by a combination of unit demand and net price favorability. As of September 30, 2020, the specialty pharmacy channel held under 2.5 weeks of inventory on hand as calculated based on trailing demand and reflects an increase in value of $1.7 million when compared to June 30, 2020. Fanapt net product sales were $20.7 million for the third quarter of 2020, a 6% decrease compared to $21.9 million in the third quarter of 2019. As of September 30, 2020, wholesalers have higher inventory on hand calculated based on trailing demand when compared to June 30, 2020. The value of this inventory change was less than $300,000. Fanapt prescriptions in the third quarter of 2020, as reported by IQVIA Xponent, increased by less than 1% compared to the second quarter of 2020. The performance of the Fanapt business during the second and third quarters of 2020 was impacted by the pandemic and the related disruption to patient visits with their physicians and restrictions on physical access of our sales force to health care providers. Based on IQVIA reported data for 2020, other branded drugs in atypical antipsychotic class also appear to have been negatively impacted by the pandemic. For the third quarter of 2020, Vanda recorded net income of $5.9 million compared to net income of $100.4 million for the third quarter of 2019. Net income for the third quarter of 2020 included an income tax provision of $2.5 million as compared to an income tax benefit of $88.1 million in the same period in 2019. Again, the income tax benefit of $88.1 million reflected in the financial results for the third quarter of 2019 includes the favorable impact of the release of Vanda's deferred tax asset valuation allowance, which occurred in the third quarter of 2019. Operating expenses in the third quarter of 2020 were $52.6 million compared to $48.7 million in the third quarter of 2019. The $3.8 million increase was primarily due to a combination of higher R&D expenses related to our late-stage clinical programs and higher commercial expenses related to Non-24 awareness and Fanapt marketing efforts. Operating expenses in the third quarter of 2020 were essentially flat as compared to $53 million in the second quarter of 2020, as new randomizations for several clinical trials remain on hold as a result of the COVID-19 pandemic. We expect the operating expenses in the fourth quarter of 2020 to be highly dependent on developments in the pandemic and the extent to which it continues to impact our R&D and commercial activities. We will continue to assess the impact of the evolving pandemic on our business and operations and will provide future updates to our financial guidance as necessary. The financial guidance we previously communicated included the following financial objectives: net product sales from both HETLIOZ and Fanapt of between $240 million and $260 million; HETLIOZ net product sales of between $155 million and $165 million; Fanapt net product sales of between $85 million and $95 million; year-end 2020 cash of greater than $340 million. I will now turn the call back to Mihales.

Thank you very much, Kevin. At this point, we'd be happy to answer any questions you may have.

[Operator Instructions] Our first question is from the line of Jason Butler of JMP Securities.

[indiscernible] for Jason. I guess, the first one, do you have any updates on the animal tox studies requested for tradipitant by the FDA? Any progress with the agency? And then I guess sticking with the FDA theme, any -- can you give us any details on discussions with the agency around the HETLIOZ sNDA for Smith-Magenis?

Of course. So first, the question is for the tradipitant 9-month toxicology dose study, which has been the center of discussion with the FDA in order for the FDA to allow safety studies to proceed beyond 3 months. And of course, you know that Vanda has characterized and explained the necessary nature of this study and is sad that Vanda will not conduct such a study that does not have a scientific justification, but it will claim the lives of dozens of beagle dogs. This discussion is continuing on with the FDA through the formal appeal process with the agency, and it is progressing. But I need to emphasize that, while this is going on, the pivotal gastroparesis study is ongoing, and it is our expectation that if we do have positive results in this study by mid-2021, that will be sufficient to file for gastroparesis indication, although we can anticipate that there may be restrictions to the length of treatment to 3 months. Of course, all this is further to be discussed, but we believe that given the metoclopramide label of 3 months, in the absence of any effective treatment beyond that, the FDA, if results are positive, will see our application favorably. No guarantees, of course, but we'll continue this discussion with the FDA. Your second question had to do with the Smith-Magenis Syndrome. The review is progressing, and we believe that the agency will take action by their target PDUFA date of December 1.

Okay. Great. And then I had a follow-up. So the gastroparesis trial has restarted. Why have some other trials not restarted due to COVID? Is it just local variability in decision-making? Or what's the rationale there?

Yes. Of course, the gastroparesis study had really slowed down, not stopped. Most, but not all sites have closed, and a few people were ongoing, and we managed to get drug to their homes. But of course, it is the nature of the disorder. You understand that this is a serious and, at times, life-threating disorder. These patients have no options. So it almost -- it is the pressure from patients and the recognition by the investigators and sites that this study must continue. Contrary to that, for atopic dermatitis, there are other therapeutic options, although there is still a significant unmet medical need. And you can see why, for that indication, it is a little more difficult to recruit and recruit with any efficient speed. On motion sickness, you recall, our positive Phase II study that we announced was conducted on actual boat travel. So given the local restrictions, it will be not possible now to put these patients on boats with the proximity and all the other COVID-19 restrictions. So hopefully, we'll come out the other way and start seeing some light and start -- begin these activities, and this study will begin. And I just also want to emphasize that the ODYSSEY study, of course, in COVID-19 pneumonia is ongoing. And in fact, it started with very significant speed in April of this year at the peak of the epidemic in New York. Recruited very quickly the first 60 patients, the results of which we reported in mid-late August. And since then, we had very slow recruitment, just a few more patients. In fact, in the last few weeks, due to recent peaks of hospitalizations in some areas of the country. But this study, as we explained in our press release, is hampered peculiarly by recruitment. While we all know there are a lot of cases and hospitalizations, nonetheless, large studies now are almost exclusively run by the U.S. government, which actually creates a difficulty in recruiting. So we are approaching the government and discussing the possibility of collaboration. And hopefully, we can report on that.

Next, we have Chris Howerton from Jefferies.

And congratulations on all the pipeline progress and, obviously, persevering in the face of pandemic. So for me, I think, interestingly, mostly related to financials, I think, in terms of the questions that I have. So I guess, first and foremost, for HETLIOZ and finance, maybe Mihales, you can remind us in terms of what the current kind of market access restrictions are. And any color you can provide to us with respect to conversion of new prescriptions to paying scripts? The second question I have relates to Smith-Magenis Syndrome. Just kind of what is the expectation in terms of the trajectory of the launch. Is there a fair amount of patients that you have in either an expanded access or compassionate use that you could theoretically convert to paying customers? And what is the expected payer mix for that patient population? And then the third one is probably a relatively simple question, but just trying to understand the impact of the DTC campaign for Fanapt. And how are you thinking about that incremental spend in the face of delays of potential label expanding clinical studies for that drug?

Yes, yes. Let me -- thank you much, Chris. So first of all, let me discuss a little bit the payer environment with HETLIOZ in Non-24. Nothing much has changed. And as we have discussed before, it is a minority, less than half of the scripts written that actually get filled, and that is with significant hurdles of prioritizations for all these scripts and then follow-on appeals. So that state of affair has not changed, in fact, has been pretty constant over the last several years. We do plan to adjust our strategy and make a push for better fill rates. But for now, it is what it has been, and we have characterized it for less than 50%, which is it a pretty sad affair. If you think about it for patients for which this is the only choice they have. But as I pointed out, the reason we remain optimistic to the growth and the momentum in next year, Non-24, is actually this surge of new demand and new scripts that we saw in the last part of August, but it continued rolling into September and October, reaching now new highs for the entire history since launch of HETLIOZ in Non-24. I will turn to your question about the SMS launch and expectations. We do have about 20 to 30 patients who have been on drug for several years now. This is in the open-label portion of the SMS study. So these people will make efforts upon approval, of course, to switch them to commercial product. Beyond that, we will focus on our existing registry of approximately 200 more families with whom we're reconnecting and letting them know about the progress of the program and, upon approval, when and if approval is received, to actually get them to start the discussion with their physicians. Our proximity and collaboration with PRISMS, where they have several hundred families as members, will be critical in getting the word out. PRISMS has been fantastic for us in helping with recruiting for the very difficult to recruit clinical programs. And they're very excited, and we're brainstorming ways that we can make their constituency aware of this solution once approved. Beyond that, as I mentioned briefly on the script, the majority of the diagnosis for microdeletion or mutation is done by specialized genetic laboratories, with who -- with one in particular we have a significant collaboration for years now, and the others are standard large laboratories where they can become points of increase in awareness. Beyond that, we believe that working together with the advocacy organization and targeted digital advertising, we'll be able to reach into the potential thousands of patients who have been already diagnosed and work with the advocacy organizations to actually enhance the rate of diagnosis. Not every patient with SMS is diagnosed today. You asked also about the payer mix of these patients. It is not yet clear. There are minors. There are adults. Some of them will depend on the parents' insurance. Some of them will be in commercial, and others will be on government settlement. We're sorting this out at least with the families that have registered in our database. That's a project that we plan to complete in the next few months. I think the third question you had was DTC spend and how does that line up with the growth of the project.

I think maybe just another one, just to maybe add a little color to that too, Mihales, is just I think if we look at the spend quarter-over-quarter this year was higher in the first quarter, slightly lower in the second quarter and basically flat to the third quarter. So I guess what's the trajectory there? And I guess is the DTC spend for Fanapt something that's meaningful? Or am I barking up an empty tree here?

Right. First of all, let me say that the guidance we have for the year for operational expense and the forecast is inclusive of what we're doing with Fanapt. This is not a campaign with just an event of -- yes, it was planned. Now if you think about the future, I cannot quantitate with you yet. I'm not going to forecast 2021. But the principle is that if the campaign is successful in return on investment, of course, that's a campaign that you want to finance even more. What we do know is that this area of antipsychotics is highly promotionally sensitive. But of course, there are thresholds to break through, so we're testing all that. The good news with DTC, which Vanda has actually extensive experience, as you know, over the last 6 years, is incremental. And as long as you have good measurements, you can have very early lead indicators. So before you commit any significant amount of money in the DTC campaign, you will start to know how it's working and what your ROI is. So the summary is no impact on the OpEx for the year. It will remain as forecasted, and we are doing this to increase revenue. And we'll continue this if, actually, the early indicators are that it will have a positive impact, and we sure hope that it will. And as I said earlier, the very early lead indicators of people's interest and awareness look good.

Next, we have the line of Joel Beatty from Citi.

The first one is on SMS. I want to check with you. And could you help characterize your confidence in approval for the setting when the FDA makes its decision in December? Just kind of -- based on the history that you have the history of a successful approval for Non-24, and then more recently, there seemed to be the rejection with the jet lag, it's a -- yes -- and so I'm curious kind of where that falls on the spectrum of how FDA could consider it.

Yes. I would say we're quite confident, and this dialogue around this and us and the FDA is not new. As you recall, we filed late last year. And after initial review, the review was halted. We went back to the FDA, and we cleared away, the issues that presented a further review. And we agreed that if we can proceed. And of course, nobody gets a glimpse of what's going to happen. But certainly, I would say the FDA is working hard on this review and progressing. They're quite familiar with the disorder and our file. And also I would point you on something quite encouraging. The FDA has a disposal, the ability, instead of an advisory committee, to hold the meeting with experts or advocacy organizations. And in this case, in the summer, they held such a meeting with patient and patient groups with SMS, trying to understand what matters. And it seems from the questions -- this is publicly available, the questions in the dialogue, they were trying to identify the key issue to be treated and was confirmed by these patients and families in this conference that it is the sleep disorder and that it is sleep quality overall, as measured by parents, that matters, which is what our primary end point is. So I would consider this that the division is very engaged and very informed on the program. And I would say we're very confident.

Great. And then I have one other follow-up question, and it's about your use of cash going forward. I noticed that it seems like you have a growing cash balance at Vanda and up maybe roughly $50 million from a year ago to the $348.5 million now. How do you -- any plans or any thoughts on how that cash could be used as it grows?

Yes. So that gives us a lot of security that we can execute on our programs. And while Vanda has been a very conservative organization over its 17 years of existence, nonetheless, we have made very significant investments, both strengthening the commercial presence, but also in the pipeline. Our pipeline this year, given the COVID pandemic, has not advanced as quickly, so you may see this reflected in the operational expenses. But we believe the balance we have not only gives us security and independence, but actually gives us the resources where we can invest not only at the growth of our commercial products, but the pipeline. I think a beautiful example of that is the very early investment we made on the collaboration with UCSF on VSJ-110. This is a novel mechanism of action, CFTR activator, in prosecretory agent, which is moving to the clinic and is going after dry eye, where it is actually a minority of the patients that are treated with the blockbusters of RESTASIS and in Xiidra. And remind you that Xiidra, a couple of years ago, it had reached a revenue of $380 million a year at Shire, and the project group was acquired. After the acquisition by Takeda, Takeda divested the product to Novartis for $3.4 billion. So all of this is a recognition that dry eye is a very significant indication. And going back to Vanda's cash balance, having the ability to pursue this type of programs and grow them is very, very important for returning value to shareholders.

And currently, there are no further questions at this time. I would now like to hand or turn the call back to Vanda management for closing remarks.

Yes. Thank you very much all for joining us, and thank you very much for your questions. And hopefully, we'll talk soon. And let's all hope for good news beginning December with the sNDA on SMS. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Enjoy the rest of your day. Keep safe, and you may now disconnect.