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On April 18, 2013, Vanda Pharmaceuticals (VNDA) stock reached a 52-week high. Why?

Until recently, many investors had given up on the Washington, DC-based pharmaceutical company. The reason was Fanapt (iloperidone), an atypical antipsychotic for the treatment of schizophrenia, that not only had a rocky regulatory history, but was a big dud at the sales counter.

Tasimelteon is the reason why some investors have regained or developed an interest in Vanda. Tasimelteon is the first compound being developed for the treatment of Non-24 Sleep Disorder. Recently, tasimelteon successfully completed Phase 3 clinical trials for the treatment of a circadian rhythm sleep disorder.

Vanda is also developing VLY-686, a small molecule neurokinin-1 receptor (NK-1R) antagonist that has indications for chemotherapy-induced nausea and vomiting, post-operative nausea and vomiting, alcohol dependence, anxiety, depression, and pruritus. Vanda licensed the investigational drug from Eli Lilly and Company (LLY).

Vanda has an agreement with Novartis (NVS) to market Fanapt, a US Food and Drug Administration (FDA) approved drug for schizophrenia. The drug recently failed to meet the primary endpoint of Phase2b/3 trials for the treatment of major depressive disorder and insomnia, but that disappointment was just the latest in a long series of pitfalls for the antipsychotic drug.

Fanapt

Fanapt (iloperidone), also known as Fanapta and Zomaril, is an atypical antipsychotic for the treatment of schizophrenia. Fanapt is a serotonin (5-HT2) receptor and dopamine receptor antagonist. The drug was approved by the FDA for use in the United States on May 6, 2009.

Fanapt was discovered by Hoechst Marion Roussel in 1995 as a novel atypical antipsychotic agent. Hoechst was a German life-sciences company that became Aventis Deutschland after its merger with France's Rhône-Poulenc in 1999. When the company joined with Sanofi-Synthélabo in 2004, it became a subsidiary of the Sanofi-Aventis (SNY) the French pharmaceutical conglomerate. In 1997, Hoechst sold the research rights to Titan Pharmaceuticals (OTCQB:TTNP). Then Titan quickly sold the worldwide rights to Novartis in 1998. Novartis then sold the Phase 3 development rights for loperidone to Vanda in 2004. Vanda originally attempted to get FDA approval for Fanapt in 2008, but the FDA refused to approve iloperidone. The agency required an additional clinical trial.

Despite all odds, in a shocking decision, the FDA approved the drug on May 7, 2009, even though Vanda did not conduct a new clinical trial, and chose to resubmit the drug to the FDA with additional data from its existing trials. The Street's Adam Feuerstein described it this way: "Hell froze over Wednesday night, right before a squadron of flying pigs took to the sky. These things must be true because the U.S. drug regulators also approved Vanda Pharmaceuticals' treatment for schizophrenia."

As a result, Vanda stock shot up nearly 1,000% from a low of $1.04 on May 6, 2009 to a high of $10.00 on May 7, 2009.

All the drama must have compelled Novartis executives to think that they must have acted too hastily by selling the rights to Fanapt. Under a 2009 agreement with Vanda, Novartis agreed to make an upfront payment to Vanda of $200 million for the exclusive rights to commercialize the drug in the United States and Canada. Vanda would also be eligible for additional payments by achieving milestones, in addition to receiving sales royalties.

Unfortunately, for Novartis, Fanapt not only flopped, the drug flopped big. It flopped so big, that during October 2010, Fanapt was inducted onto Fierce Pharma's "Pharma's Biggest Flops" list.

As Fierce Pharma explained it, "After a strong start in January 2010, garnering $21 million in revenue, Fanapt's sales fell off a cliff…When it comes down to it, there is too much competition in the antipsychotic industry; between highly regarded brand names and lower-priced generics, Fanapt never had a chance in the market."

Until recently, Vanda stock has been on a steady decline. The stock has been under $10 since May 2010, and under $5 since April 2012. The stock hit a 52 week low of $2.92 on November 15, 2012, after reaching a high of $4.68 on April 18, 2013.

Schizophrenia affects about 1% of the U.S. adult population. Symptoms include hallucinations, delusions, disordered thinking and behavior, and abnormal expression of emotions. Hearing voices that other people don't hear is the most common type of hallucination. These experiences can make people with the disorder fearful and withdrawn.

Fanapt and all atypical antipsychotics contain a boxed warning, the FDA's strongest warning. The warning alerts prescribers about an increased risk of death associated with off-label use of these drugs to treat behavioral problems in older people with dementia-related psychosis. The FDA has not approved Fanapt as a treatment for dementia-related psychosis.

Fanapt demonstrated efficacy in two placebo-controlled short-term clinical trials. In both, Fanapt was superior to placebo (sugar pill) in reducing the symptoms of schizophrenia.

The most common adverse reactions reported by patients using Fanapt in clinical trials were dizziness, dry mouth, fatigue, nasal congestion, sudden fall in blood pressure causing light-headedness upon standing (orthostatic hypotension), drowsiness, rapid heart rate (tachycardia) and weight increase.

Under the 2009 agreement with Novartis, Vanda retained rights to develop and commercialize Fanapt outside the territory of United States and Canada. In July 2011, Vanda signed an agreement with Probiomed S.A. de C.V., a wholly owned pharmaceutical operating unit of Proquifin S.A. de C.V., to market Fanapt in Mexico. Vanda also signed an agreement with Biotoscana Farma to commercialize the drug Argentina in August 2011. In December 2011, Vanda and Megapharm, Ltd. signed an agreement to commercialize Fanapt in Israel. The Israel Ministry of Health granted market approval for the drug in August 2012.

In December 2012, the European Medicines Agency's (EMA) Committee for Medicinal Product for Human Use (OTCQB:CHMP) issued a negative opinion recommending against the approval of Fanaptum for the treatment of schizophrenia in adult patients in the European Union. The CHMP contended that the benefits of Fanaptum did not outweigh its risks and recommended against marketing authorization at this point in time.

On March 14, 2013, Vanda announced that it withdrew its Marketing Authorization Application submitted to the EMA CMPH for Fanaptum for the treatment of adult patients with schizophrenia. The withdrawal was based on a request by the CHMP/Rapporteur/Co-rapporteur for Vanda to submit the results from an ongoing relapse prevention, randomized iloperidone-placebo withdrawal study in patients with schizophrenia. Vanda claimed that the results of this study would not be available in the timeframe allowed The company intends to reassess its European regulatory strategy for Fanaptum once the results from the Relapse Prevention Study in Patients with Schizophrenia become available.

Fanapt prescriptions as reported by IMS were approximately 38,200 for the fourth quarter of 2012, representing a 1% decrease versus third quarter 2012 prescriptions but a 13% increase from the fourth quarter 2011 prescriptions.

Fanapt became the subject of controversy during the mass killings at Sandy Hook Elementary School when it was alleged that Adam Lanza was prescribed Fanapt. Since aggression, hostility, and mania have been cited as infrequent adverse reactions to Fanapt, some thought use of the drug could be a reason why Lanza went on his shooting spree. Although several media outlets quoted Adam Lanza's uncle as saying Lanza was on Fanapt at the time of the shootings, the quote has been deleted from a New York Daily News report, and it is unclear whether Lanza was taking Fanapt.

Tasimelteon

Tasimelteon is the first compound being developed for the treatment of Non-24 Sleep Disorder. Tasimelteon is a specific and potent agonist of the human MT1 and MT2 receptors. Compounds that selectively bind to melatonin receptors are thought to be able to regulate the "body clock" and may be useful to treat circadian rhythm sleep disorders, a group of sleep disorders that affect the timing of sleep.

Most people have an internal body clock that runs slightly longer than 24 hours. Light is the primary environmental cue that resets this clock to 24 hours each day. People with Non-24 sleep disorder have a body clock that continually delays, so they go to sleep later each day, until night is experienced during the day and day is experienced at night, until the cycle starts all over again. People with circadian rhythm sleep disorders are unable to sleep and wake at the times required for normal work, school, and social functions.

Non-24 is common in people who are totally blind because without light perception, their body clock is unable to synchronize with the 24-hour day-night cycle.

Non-24-Hour is a chronic circadian rhythm sleep disorder that affects a majority of totally blind individuals in the United States, which is estimated to encompass between 65,000 and 95,000 people. A recent study found that 70% of totally blind people with sleep complaints suffer from Non-24.

Non-24 occurs almost entirely in individuals who are totally blind and lack the light sensitivity necessary to synchronize the brain's circadian rhythms with the 24-hour day-night cycle.

On March 25, 2013, Vanda announced that the FDA's Division of Neurology Products confirmed that the efficacy and safety data proposed by Vanda to be submitted in its new drug application (NDA) for tasimelteon as a treatment of Non-24-Hour Disorder was adequate. Vanda is planning to submit the NDA in mid-2013.

In December 2012 and in January 2013, Vanda announced positive results for two Phase 3 studies for tasimelteon in the treatment of Non-24.

Vanda's first Phase 3 study, known as "SET" found that tasimelteon was able to entrain the master body clock as measured by both melatonin and cortisol circadian rhythm. Researchers also found that tasimelteon significantly improved other clinical symptoms including total sleep time, nap duration, and timing of sleep.

The second Phase 3 trial, called "RESET" demonstrated the maintenance effect of tasimelteon to entrain melatonin and cortisol circadian rhythms in individuals with Non-24. In this study, researchers found that patients treated with tasimelteon maintained their clinical benefits, while patients receiving placebo showed significant deterioration in measures of nighttime sleep, daytime naps, as well as the timing of sleep. During this study, tasimelteon was demonstrated to be safe and well-tolerated.

Vanda plans to submit a new drug application (NDA) for tasimelteon to the FDA in mid-2013.

On January 31, 2013, Vanda announced that the MAGELLAN Phase 2b/3 clinical trial studying tasimelteon as a treatment for major depressive disorder did not meet the primary endpoints of the study. The trial was comprised of 507 patients in 43 sites in the United States. The results of the trial were a big disappointment for Vanda because an effective treatment for major depressive could be a big revenue generator for the company.

Major depressive disorder is one of the most common mental disorders in the United States, affecting approximately 14.8 million American adults, according to the National Institute of Mental Health.

Vanda has discontinued all studies related to tasimelteon as a treatment for major depressive disorder.

VLY-686

VLY-686 is an NK-1 receptor antagonist Vanda licensed from Eli Lilly in 2012. VLY-686 has demonstrated proof-of-concept in alcohol dependence. NK-1R antagonists have been evaluated in a number of indications including chemotherapy-induced nausea and vomiting (CINV), post-operative nausea and vomiting (PONV), alcohol dependence, anxiety, depression, and pruritus.

On August 16, 2012, Vanda announced that the company agreed to pay Lilly an initial license fee of $1 million and that Vanda will be responsible for all development costs. Lilly is also eligible to receive additional payments based upon achievement of specified development and commercialization milestones, as well as tiered royalties on net sales at percentage rates up to the low double digits. These milestones include $4 million for pre-NDA approval milestones and up to $95 million for future regulatory approval and sales milestones.

Finances

On February 12, 2013, Vanda announced financial and operational results for the fourth quarter and full year ended December 31, 2012.

Total revenues for the full year 2012 were $32.7 million, compared to $31.3 million for 2011. Full year 2012 revenues included $5.9 million in Fanapt royalties received from Novartis, as compared to $4.5 million for the prior year. Both 2012 and 2011 revenues include $26.8 million recognized from the $200.0 million upfront payment previously received from Novartis for Fanapt U.S. and Canadian rights.

Total operating expenses for 2012 were $61.0 million, compared to $42.0 million for 2011. The primary driver of the higher expenses in 2012 was the ongoing support of the tasimelteon Non-24 and MDD clinical studies.

Vanda recorded a net loss of $27.7 million for 2012, compared to net loss of $9.8 million for 2011. Diluted net loss per share for 2012 was $0.98, compared to a diluted net loss per share of $0.35 for 2011.

Total revenues for the fourth quarter of 2012 were $7.9 million, compared to $8.4 million for 2011. Fourth quarter 2012 revenues included $1.2 million in Fanapt royalties received from Novartis as compared to royalties of $1.6 million for the fourth quarter of 2011.

Total operating expenses for the fourth quarter of 2012 and 2011 were each $14.3 million.

Vanda recorded a net loss of $6.4 million for the fourth quarter of 2012, compared to a net loss of $5.5 million for the fourth quarter of 2011. Diluted net loss per share for the fourth quarter of 2012 was $0.23, compared to a diluted net loss of $0.20 per share for the fourth quarter of 2011.

Vanda's cash, cash equivalents and marketable securities as of December 31, 2012 totaled $120.4 million.

Recommendation: Buy

On March 5, 2013, Piper Jaffray initiated coverage of Vanda with an "Overweight" rating. On February 14, 2013, Jefferies upgraded Vanda Pharmaceuticals "Hold" to "Buy," and raised the stock's price target to $6.00, up from $3.50. On February 5, 2013, Lazard Capital initiated coverage of Vanda with a "Buy" rating and an $11 price target. On January 17, 2013, JMP Securities started coverage on "Vanda" with a "Market Outperform" and a $9 price target.

The results from the SET and RESET studies appear to strongly indicate that tasimelteon has the ability to synchronize circadian rhythms, resulting in significant clinical benefits for patients with Non-24.

I believe the FDA will approve tasimelteon as the first circadian regulator, which allows tasimelteon to occupy an exclusive position in the market.

Since I do not see much of a future for Fanapt, I think it is important that the Non-24 indication for tasimelteon represent a significant standalone commercial opportunity for Vanda. I believe that tasimelteon offers Vanda that opportunity. The company is also in an extremely strong cash position and is led by a tenacious management team that has a clear vision and plan for the company's future.

Source: Why Did Vanda Pharmaceuticals Hit A 52-Week High?