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What if I told you that nearly 50% of all of the totally blind individuals here in the US suffer from a chronic circadian sleep disorder which impairs their ability to differentiate between such things as night and day? You'd most likely react curiously intrigued, which was similar to the way I had reacted when researching the biotech firm, Vanda Pharmaceuticals (VNDA).

Vanda Pharmaceuticals is currently in the process of developing a drug, Tasimelteon, to combat the chronic circadian sleep disorder, better known as Non 24-Hour Disorder.

According to 24sleepwake.com, "Non-24-Hour Disorder is a chronic circadian rhythm sleep disorder that affects more than 50 percent of the totally blind individuals in the U.S., or 65,000 to 95,000 people. Non-24-Hour Disorder occurs almost entirely in individuals who are totally blind and lack the light sensitivity necessary to reset the circadian clock. Without light perception, the brain's circadian rhythms, which guide many of the body's functions, including sleep, are not reset to a regular 24-hour cycle."

Company Overview

Vanda Pharmaceuticals is based in Washington, DC, and is focused on the development and commercialization of products for the treatment of central nervous system disorders to address unmet needs. Aside from Tasimelteon, the company's pipeline also includes an initiative surrounding the advancements of Pharmacogenetics, the development of an NK-1 receptor better known as VLY-686, and its previous approved drug intended for the treatment of schizophrenia better known as Fanapt.

As of January 25th shares of VNDA carry a market cap of $120.81 million, have traded up 7.83% since August 1st and trade at about a 23.88% premium to their 50-DMA and are currently trading at a 5.97% premium to their 200-DMA. As of September 30th, 2012 and from a balance sheet perspective, Vanda has $134.40 million in cash, or $4.76/share. Investors should note that shares of Vanda also carry a book value per share of $0.54/share.

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RESET Study Overview

On Wednesday it was announced that the company had made significant strides with regard to the second Phase III trials of Tasimelteon which had participated in the RESET study. According to a recent press release by the company, "RESET is a randomized withdrawal study designed to demonstrate the maintenance effect of 20 mg Tasimelteon in the treatment of Non-24-Hour Disorder. Twenty totally blind individuals with no light perception and diagnosed as having a body clock period of greater than 24 hours will be treated with Tasimelteon for three months during a run-in phase. Patients who respond well to Tasimelteon treatment during the run-in phase, as measured by the resetting and alignment of their body clock to the 24-hour day, will then be randomized either to receive placebo or to continue receiving Tasimelteon for 2 months." The RESET Study contained both a primary and several secondary endpoints all of which would need to be met in order for the Phase III clinical trial to be a success.

Primary Endpoint: The RESET study was a 20 patient randomized withdrawal study designed to demonstrate the maintenance effect of 20mg of Tasimelteon in the treatment of blind individuals with Non-24. Patients were treated with Tasimelteon for three months during an open-label run-in phase. Patients who responded to Tasimelteon treatment during the run-in phase, as measured by entrainment of the melatonin rhythm (aMT6s) to the 24-hour day, were then randomized to receive either placebo or continue receiving Tasimelteon 20mg for 2 months. The primary endpoint of the study was the maintenance of effect as measured by entrainment of the melatonin (aMT6s) rhythm.

Secondary Endpoint: The RESET study also assessed a number of secondary endpoints including maintenance of entrainment of the cortisol rhythm and a range of sleep and wake parameters including LQ-nTST (total nighttime sleep in the worst 25% of nights), UQ-dTSD (total daytime sleep duration in the worst 25% of days) and MoST (midpoint of sleep timing from both nighttime and daytime sleep).

Tasimelteon - Phase III Clinical Trial Results

Vanda Pharmaceuticals had noted that "the RESET study demonstrated the maintenance effect of 20mg of Tasimelteon to entrain melatonin and cortisol circadian rhythms in individuals with Non-24. Tasimelteon treated patients maintained their clinical benefits while placebo treated patients showed significant deterioration in measures of nighttime sleep, daytime naps, and timing of sleep." The continued development of Tasimelteon is going to play a key role in the life-cycle of the company, and before a position is established, one must consider all types of catalysts.

Negative Catalysts

Are there any negative catalysts to consider before establishing a long-term position in Vanda? Although the company's Phase III trials have met their primary and secondary endpoints, my concerns lie with the FDA and the company's cash burn.

According to Wednesday's announcement, "Vanda plans to submit a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) in mid-2013 and intends to meet with the FDA in Q1 of 2013 for a pre-NDA meeting regarding Tasimelteon and the treatment of patients with Non-24." If for any reason the FDA rejects the application and subsequently fails to approve Tasimelteon, shares could be in for a very rough ride.

From a fundamental perspective potential investors need to consider the company's change in cash flow over the last three years. As of December 31st, 2009 the company had $169.33 million in terms of total cash flow from operations, however full year cash flow from operations number saw a significant decline in 2010 followed by an ever greater decline in 2011. For the year ending December 31st 2010 the company had demonstrated a negative cash flow of $10.90 million and for the year end December 31st 2011 the company had demonstrated a negative cash flow of $28.41 million.

Final Analysis

For those of you who may be interested in establishing a position in Vanda, I'd look to establish a small-to-medium sized position at current levels, and keep an eye out for any indication by the FDA with regard to Tasimelteon. If Tasimelteon is approved, I'd look to increase my current position by at least 25%-50%, and if by chance the drug is rejected by the FDA I'd look to get what I could for my shares and abandon my position. If however the company continues to burn through cash at such an alarming rate, I'd look to hold off putting all my eggs in one basket as secondary offerings could be commonplace until the FDA makes a decision regarding the company's lead-drug candidate.

Source: As The Cash Burn At Vanda Pharmaceuticals Intensifies, All Eyes Are Now On The FDA