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Vanda Pharmaceuticals, Inc. (NASDAQ:VNDA)

Q4 2009 Earnings Call

February 16, 2010 09:00 am ET

Executives

Stephanie Irish - Acting CFO

Mihael Polymeropoulos - President and CEO

Analysts

David Moskowitz - Madison Williams

Oren Livnat - Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Vanda Pharmaceuticals Incorporated earnings conference call. My name is Tuanda and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Stephanie Irish. You may proceed.

Stephanie Irish

Thank you, Tuanda. Good morning and thank you for joining us to discuss Vanda Pharmaceutical's fourth quarter and full year 2009 performance. Our fourth quarter and full year 2009 results were released this morning 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, and a telephone replay of the call will be available through February 23, 2010.

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 fourth quarter and full year 2009 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. Words such as, but not limited to, belief, expect, anticipate, estimate, intend, plan, target, likely, will, would and could and similar expressions or words will identify forward-looking statements. Our forward-looking statements are based upon current expectations that involve changes in circumstances, assumptions and uncertainties and other risks. These risks are described in the Risk Factor section of our quarterly report on the Form 10-Q for the fiscal quarter ending September 30, 2009 which is also available on the SEC Edgar system and on our website. We encourage all investors to read this report 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 any forward-looking statements we may make on this call on account of new information, future events or otherwise, as except required by law.

With that said, I would now like to turn the call over to our CEO, Mihael Polymeropoulos.

Mihael Polymeropoulos

Good morning, and thank you very much for joining us. In the fourth quarter of 2009, Vanda achieved a very significant milestone towards the commercialization of our first product, Fanapt, for the treatment of schizophrenia.

In October, we announced the commercialization and development partnership with Novartis Pharmaceutical for the US and Canada. As a result of this collaboration, Vanda received an upfront payment of $200 million at the end of December. As we previously announced, Novartis launched Fanapt in the US in January 2010 for the treatment of patients with schizophrenia. We believe that Fanapt will offer an important new option in the treatment of these patients and as such, we are excited about the potential value Vanda may derive through the Novartis partnership.

We believe that the Fanapt franchise will continue to add value to our company through the expansion of the market for the oral formulation outside the US as well as through the development and registration of once a month injectable depot formulation.

Vanda is currently evaluating the regulatory path and commercial opportunity for Fanapt outside of the US and Canada. We expect to continue the development program for the depot formulation with our partner in Novartis who will be responsible for its further development and administration in the US and Canada.

We believe the depot formulation of Fanapt is an integral part of the lifecycle management of the Fanapt brand. The depot formulation relation is administered once every four weeks and we believe it will be a compelling complement to the oral formulation for both physicians and patients. During the earlier Phase 2 trial of the formulation for schizophrenia patients, we demonstrated the consistent relief over a four week time period with good tolerability.

I will now turn to our second compound tasimelteon. In the fourth quarter of 2009, we continued the clinical regulatory and commercial evaluation of tasimelteon, our selective melatonin receptor agonist. Compounds that bind selectively to melatonin receptors are candidates to treat sleep disorders, including circadian rhythm sleep disorders and additionally our belief to potential benefit in mood disorders.

On January 19, 2010, the US Food and Drug Administration (FDA) granted orphan drug designation status for tasimelteon in a specific CRSD, non-24-hour sleep/wake disorder in blind persons indication. The FDA grants orphan drug designation to drugs that may provide significant therapeutic advantage over existing treatments and target conditions affecting 200,000 or fewer US patients per year. Tasimelteon has already been shown in one Phase II study and one Phase III study to significantly improve sleep onset and sleep maintenance parameters as well as affect the sleep rate cycle rhythm.

Additionally tasimelteon may have broader application in circadian rhythm disorders including the delayed sleep/wake disorder and jet lag insomnia affecting millions of people worldwide. As we continue to explore the past to a new drug application for tasimelteon, the orphan drug designation in non-24-hour sleep/wake disorder has the potential to strengthen the tasimelteon program by offering clinical development and commercialization benefits.

Now Stephanie will address our financial results for the quarter and year ended December 31, 2009. Stephanie?

Stephanie Irish

The company reported a net loss of $9.2 million for the fourth quarter of 2009 compared to $7.7 million for the third quarter 2009 and $7.5 million for the fourth quarter of 2008. Total revenue for the fourth quarter of 2009 was $4.5 million consisting of $2.6 million in upfront licensing revenue and $1.9 million in product revenue for inventory sold to Novartis. The remaining $197.4 million in deferred revenue which relates to $200 million upfront payment received from Novartis pursuant to the Fanapt license agreement will be recognized ratably through May 2017. Total expenses for the fourth quarter of 2009 were $13.8 million, compared to $7.7 million for the third quarter of 2009 and $7.7 million for the fourth quarter of 2008. For the full year of 2009, total expenses were $40.5 million, compared to $52.8 million for 2008. Total R&D expenses were $13.9 million compared to $23.9 million during 2008.

Net loss per common share for the fourth quarter of 2009 was $0.34, compared to $0.28 for the third quarter of 2009 and $0.28 for the fourth quarter of 2008. For the full year of 2009, net loss per common share was $1.33, compared to $1.92 for the full year of 2008. R&D expenses totaled $2.3 million for the fourth quarter of 2009 and consisted primarily of $900,000 of salaries and benefit, $500,000 of non-cash stock based compensation cost for R&D personnel, $300,000 in consultancy and $200,000 for an ongoing cohort study. This compares to $2.1 million for the third quarter of 2009 and $3.6 million for the fourth quarter of 2008.

The increase in R&D expenses in the fourth quarter 2009 relative to the third quarter of 2009 is primarily due to the 2009 employee bonus expense. The decrease in R&D expenses in the fourth quarter of 2009 relative to the fourth quarter of 2008 is primarily due to the regulatory consulting fees related to the Fanapt approval approved in the fourth quarter of 2008. For the full year of 2009, total R&D expenses were $13.9 million, compared to $23.9 million for 2008. Lower R&D expenses resulted from the lower clinical trial costs and related manufacturing costs incurred in 2009.

General and administrative expenses totaled $9.2 million for the fourth quarter of 2009 and consisted primarily of $1.3 million of salaries and benefits, $1.9 million of non-cash stock based compensation costs for G&A personnel as well as $1.2 million of legal fees and $3.7 million of consulting and financial advisor fees primarily relating to the transaction with Novartis and $200,000 of insurance costs. This compares to $5.3 million for the third quarter of 2009 and $4.1 million in the fourth quarter of 2008.

The increase in G&A expenses in the fourth quarter of 2009 relative to the third quarter of 2009 and to the fourth quarter of 2008 is primarily due to an increase in legal and consulting fees and financial advisor fees accrued in the fourth quarter of 2009 which is related to the transaction with Novartis. For the full year of 2009, total G&A expenses were $23.7 million, compared to $28.9 million in 2008. The year-over-year decrease in G&A expenses is primarily due to the decreased expenses in commercial and marketing relating to Fanapt.

Employee stock-based comp expense recorded in the fourth quarter of 2009 totaled $2.4 million. Of these non-cash charges, $500,000 we recorded as R&D expense and $1.9 million was recorded as G&A expense. For the third quarter of 2009 and the fourth quarter of 2008, total stock-based comp expense was $3.3 million and 700,000, respectively. The decrease in stock-based comp expense in the fourth quarter of 2009 relative to the third quarter of 2009 is the result of the full vesting of non-qualified options issued at a higher fair market value. The increase in stock-based comp expense in the fourth quarter of 2009 relative to the fourth quarter of 2008 is primarily due to a lower stock-based compensation expense resulting from the workforce reduction in the fourth quarter of 2008.

For the full year of 2009, total stock-based compensation was $10.8 million, compared to $13.4 million in 2008. Cash and marketable securities increased by $184.6 million during the fourth quarter in 2009. Changes included $9.2 million of net losses, the payment of the $5.0 million balance due to Novartis for the milestone payment relating to the FDA's approval of the NDA for Fanapt and increases in other working capital of $1.9 million. This was offset by increases in the deferred revenue of $197.4 million, $3.0 million in non-cash depreciation, amortization, and stock-based compensation expense and $300,000 in proceeds from the exercise of employee stock options.

The company's cash, cash equivalents and marketable securities as of December 31, 2009 totaled approximately $205.3 million, compared to approximately $46.5 million as of December 31st, 2008. Our primary objective over the next quarter is to conserve cash while supporting the Fanapt launch. In addition, we intend to engage in discussions with several foreign regulatory agencies to review their filing requirement with respect to Fanapt. We also plan to continue the clinical, regulatory and commercial evaluation of tasimelteon.

Our fixed overhead costs are expected to be $10 million to $12 million annually. We will recognize revenue of $26.8 million in 2010 for the amortization of the deferred up front payment received from Novartis. The forecasted royalty revenue and sales milestones based on the sales of Fanapt by Novartis cannot be determined at this time. We expect to receive $7.7 million from Novartis for Fanapt inventory, of which $2.0 million was recorded as a receivable at year-end. In addition, we are currently working with our tax advisors to determine our tax liability relating to the receipt of the $200 million upfront payment from Novartis in late 2009.

Generally under the internal revenue code, an accrual [ph] taxpayer is required to include in taxable income certain cash payments in the year that's received. Revenue Procedure 2004-34 however allows taxpayers a limited deferral beyond the taxable year of receipt for certain advances. For federal income tax purposes, we may avail ourselves on this provision to defer the recognition of income on the upfront payment from Novartis. As a result, only a portion of the $200 million upfront payment from Novartis that was received in 2009 is expected to be included in our taxable income for the year ended December 31, 2009.

Any of the income from the $200 million payment that was not recognized in 2009 will be recognized in taxable income for the year ending December 31st, 2010 and is expected to create income tax liabilities for the company. The timing of the payment of the income taxes is due largely dependent upon when the income is recognized for financial statement purposes, as well as the company's ability to utilize its carry forward tax attributes in offsetting the income recognized for the receipt of the $200 million upfront payment.

As of December 31, 2008, the company had approximately $123.7 million of net operating loss carry-forward incurred since 2003, this may potentially be used to offset future taxable income and thereby reduce the company's US federal income taxes that would otherwise be payable.

Section 382 of the Internal Revenue Code, imposes an annual limit on the ability of a corporation that undergoes an ownership change to use its net operating loss carry-forward to reduce its tax liability. As a result of certain changes in Vanda's shareholder base, the company's ability to utilize these net operating losses to offset future taxable income in any particular year maybe limited pursuant to the Section 382.

At this time, I will turn the call back over to Mihael.

Mihael Polymeropoulos

Thank you, Stephanie. We would be happy to address any questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mr. David Moskowitz with Madison Williams.

David Moskowitz - Madison Williams

First of all, just pertaining to the launch of Fanapt, so we were hearing that this launch was a PI only, package insert only, and that the advertising materials from DDMAC have not been approved yet. Can you elaborate on what's happening there and when we might expect to see those materials come out if they haven't already?

Mihael Polymeropoulos

Certainly. First of all, we believe Novartis is doing a fantastic job launching the drug and getting on the market in front of the doctors and in fact what we all need to appreciate is that our deal closed effectively through Hart-Scott-Rodino late November and Novartis was very diligent to put their sales force in front of doctors in the first week of January. In order to do that and not delay the further commercialization of the drug, the launch was based on the label of the drug, which otherwise if referred to as a PI or a package insert launch. Many drugs, as you all know are offered with additional materials, visual aids for the doctors, interactions with the patients, et cetera, and all these material has been prepared and is under review by the FDA.

I cannot tell you a timing on this material, but as these materials begin to come in, become available to the sales force, that will strengthen the promotion of the drug.

David Moskowitz - Madison Williams

Just a subtlety that you mentioned, wondering how you can answer this, but you mentioned that you believe Novartis is doing a very good job, a terrific job launching the product. Can you talk to us about, in your mind what metrics are you thinking about when you say, when you make a statement like that?

Mihael Polymeropoulos

When I made the statement actually I was referring to the diligence of Novartis to put the sales force together and very quickly launch the drug. Unfortunately I cannot make any comment into the tactics as you can understand in the commercialization strategy of Novartis on this product. This may become more clear in the future if Novartis elects to discuss some of that strategy. But what has been impressive is the speed by which Novartis was able to put together the brand new sales force and establish the Fanapt franchise within the company.

David Moskowitz - Madison Williams

So in addition to speed, and I guess I would be interested in sort of scale, can you talk a little bit about, I know this is competitive information, but you guys I believe were planning to use 200 to 250 reps to sell this product back when you guys were building marketing sales force, can you talk about the scale that Novartis has relative to that?

Mihael Polymeropoulos

David, I think you answered your question in the question, that it is competitive information and neither we or Novartis or anyone else would discuss the size of their sales force. But what I can tell is that during our diligence to identify a partner, one of the things that we are very focused on is the size, quality and commitment of the commercial attempt to launch Fanapt. And I can tell you that in all these categories, Novartis checked every box in our minds was superb.

David Moskowitz - Madison Williams

If I could just ask that another way, would you say that, if you were impressed at their efforts, would you say it was somewhat better than what you expected or what you were planning on your own?

Mihael Polymeropoulos

Vanda on its own would not have come close at all to what Novartis has been able to put together today. But let's see the results of these sales force growth (inaudible) over the next few months as we can start understanding over the next few months the scripts and the revenues, we will understand whether indeed what we believe to be quality launch is delivering.

David Moskowitz - Madison Williams

Just a financial question, you're talking about your fixed overhead costs of $10 million to $12 million. Just a couple of questions on that. Number one, does that include R&D spend? Does it include stock-based comp? So is this sort of a net number on the cash basis on what we can expect the company to spend on an ongoing basis?

Stephanie Irish

David, it's cash basis, it does not include stock-based comp, it does include general R&D personnel, but no additional R&D spend other than the conclusion of our cohort [ph] study.

David Moskowitz - Madison Williams

So this is your base case spend on a cash basis?

Stephanie Irish

Correct.

Operator

And your next question comes from the line of Mr. Corey Davis with Jefferies.

Oren Livnat - Jefferies

This is Oren Livnat for Corey. Just to follow up quickly on that last question, can you give us a little sense of what sort of potential R&D commitments you guys are willing to make while you are still in “cash conservation mode?” You had pretty exciting news with tasimelteon there on the orphan designation. I was wondering if you are planning on accelerating any sort of early R&D spend there in the meantime?

Mihael Polymeropoulos

Our top priority is to conserve cash as we support Novartis with the launch and the further development of Fanapt in the depot formulation. Now we're very excited about tasimelteon, we're very excited about the orphan designation and the prospects. However, we will not be committing immediately resources before we have a better understanding on the (inaudible) approval with the FDA discussion but also we need to understand a little more of the strength of the launch of Fanapt.

Oren Livnat - Jefferies

Okay. And any R&D spending on the existing plans, the depot formulation, that's all on Novartis' tab for the time being?

Mihael Polymeropoulos

Yeah, we hope that Novartis will be submitting significant resources soon, but again there would be zero financial impact on Vanda from the further development with depot formulation.

Oren Livnat - Jefferies

Do you think that they are also waiting to see for a relatively extended period of time how successful the initial oral launch is before they themselves commit any capital and efforts to moving the depot formulation further towards market?

Mihael Polymeropoulos

No, we do not believe so, Novartis is committed to the depot formulation and may be I’d say a few things on that, the depot formulation is not just a line extension of the oral, many times you see another formulation of the drug as a line extension. It is actually a drug on its own, which treats the symptoms of schizophrenia, while at the same time offering convenience for compliance. The expectation is that the depot formulation not only will complement the oral franchise of Fanapt but actually will expand the offering to patients that are on average a typical anti-psychotic which do not have or are not able to develop long-term depot formulation. The advantage is that we've seen in Fanapt, the better tolerability with the oral formulation will extend into the depot formulation. We may make the depot formulation one of the most well tolerated four-week injectables out there. And while Novartis will focus their development for their U.S. and Canada registration, that is where they have rights, we are entitled to have access to all the data for our submissions elsewhere, including the European Union. And as we understand it today, from the sales of Risperdal Consta which is a two-week injectable formulation, it has performed very well outside of the US, so that last year it brought revenues in Europe of $1 billion versus $350 million in the U.S. market.

There is an appetite by both patients and physicians for the depot formulations that extend beyond the vast U.S. market and in fact may be that outside the U.S. market can be very large. So the summary is that Novartis is committed to begin the development program as expeditiously as possible and we are committed to a system and take the data and submit for registration in countries outside of the U.S. as soon as possible.

Operator

And your next question is a follow-up from the line of Mr. David Moskowitz with Madison Williams, please proceed.

David Moskowitz - Madison Williams

Yes, thanks again. Let me just ask a couple of financial questions. So could you give the breakdown, out of that $10 million to $12 million of net spend, can you talk about how much of that would be allocated to overhead, or SG&A or G&A, and how much would be on the R&D side?

Stephanie Irish

Are you talking about additional R&D other than personnel or including…

David Moskowitz - Madison Williams

Okay, so the $10 million to $12 million base case spent, how much of that is G&A and how much of that would be R&D? So if it's only just personnel and R&D, then what is that amount?

Stephanie Irish

You want the allocation of G&A and R&D for the year?

David Moskowitz - Madison Williams

Exactly. As we model and you guys report, we model those lines separately. So I'm just trying to understand what that breakdown is?

Stephanie Irish

I would say that the G&A portion is about $6 million and then the $6 million to $7 million R&D portion would be $3 million to $4 million.

David Moskowitz - Madison Williams

Okay. So $6 million to $7 million, $3 million to $4 million. So that's right about $10 million to $11 million. Okay. Appreciate that. Now, the $7.7 million that you still have to receive from Novartis, do you still have to receive all of that $7.7 million, or did you guys receive $2 million in the fourth quarter?

Stephanie Irish

No we reported the $2 million as receivable on the fourth quarter, we should be receiving that in 2010.

David Moskowitz - Madison Williams

Okay. So from a cash perspective, we'll get the $7.7 million in this year but from a reporting perspective on GAAP P&L, will you see the $7.7 come in as well?

Stephanie Irish

No, for the P&L perspective, we reported $2 million already in 2009, so you’ll receive $5.7 million.

David Moskowitz - Madison Williams

Okay. Question for you guys. I know you guys aren't hedge fund, I don't think so, but how will you invest this cash at this point and can you give an idea of what expected return you might have?

Mihael Polymeropoulos

No.

David Moskowitz - Madison Williams

You should become a hedge fund.

Mihael Polymeropoulos

We are a pharmaceutical company and our aim is to develop useful treatment for patients. We have shown that we can do that, we have done it already with Fanapt. And we hopefully we will continue to do this in the future. And of course, at the same time, we are a public company with a shareholder base that we greatly appreciate. And we will make every effort to balance the shareholder value with the continuous growth of the company.

David Moskowitz - Madison Williams

Okay, Stephanie, in terms of using rates of interest if you will on this cash, just normal rates 1%, something like that, 1.5%?

Stephanie Irish

You’ll have to make that combination; we don't give out our rate of returns.

David Moskowitz - Madison Williams

But there is nothing that you guys can do to enhance those returns?

Stephanie Irish

No.

David Moskowitz - Madison Williams

And you also made a statement about the taxes being due when they are recognized by the financial statements, I recognized your auditors are still trying to figure out how you are going to pay the tax here? I guess is there a possibility that since you are amortizing that payment over the next seven years, seven plus years, that you can differ the taxes and pay those as you go?

Stephanie Irish

No, not for the upfront payment. We can only differ that over one year.

David Moskowitz - Madison Williams

Okay. And last question is, so you have NOLs of $123.7 million, you guys paid a lot of money for consulting fees to get this product through the FDA and then you just recently paid some fees related to closing the Novartis transaction. I guess the question is, since the turnover of the shareholder base, the large turnover of the shareholder base, what can you say you guys have generated in the form of NOLs since that period of time?

Stephanie Irish

We're currently still evaluating that study, David.

David Moskowitz - Madison Williams

Okay. Well, then can you remind us on the consulting fees and the closing costs for the Novartis transaction, what did those total? Do you have those offhand?

Stephanie Irish

In the fourth quarter, it would be about $3.5 million.

David Moskowitz - Madison Williams

I'm forgetting, how much did it cost you for the FDA consultant?

Stephanie Irish

Well, that was pre-fourth quarter.

David Moskowitz - Madison Williams

Right. How much?

Stephanie Irish

$6 million.

Operator

And your next question is a follow-up from the line of Mr. Corey Davis with Jefferies.

Oren Livnat - Jefferies

Hi. This is Oren again. Just wanted to follow-up, I know you are obviously not commenting too much on the specifics of the Fanapt launch. I'm just wondering actual Red Book pricing is out there, we can see what that is, but can you sort of qualitatively at least give us a hint of where this thing is actually sort of net being positioned on a pricing basis, just versus existing products. Is that out of the purview of what you are going to discuss?

Mihael Polymeropoulos

Actually, Oren, I do not know that actually, and in fact it is something that usually evolves over a period of time. Let me give you the dynamics of that. The majority of patients with schizophrenia are either eligible for Medicaid or Medicare Part D and usually the split is about half and half. On the Medicaid side, there is a rebate that the company will pay through CMS, that's the 15.1%. On the Medicare Part D, this is managed by third party organizations and their individual rebate that are not publicly available and are negotiated individually between the manufacturing company and those parties and those negotiations usually take sometime because you do it once, you understand a little better the volume and what kind of volume discount you may want to get. So I would say that translation from gross to net unfortunately will not be apparent for several months to come.

Corey Davis - Jefferies

And do you expect to see immediate revenue pull through for your royalty line as these sales materialize regardless of magnitude in these very early goings?

Mihael Polymeropoulos

We will have a revenue in the first quarter. I cannot tell you the magnitude of that but we do get a percent as royalty of all revenue. So there will be some revenue to be recognized and I cannot forecast what that is. But I'm certain that in our next earnings call we will be discussing that.

Corey Davis - Jefferies

Okay. So the thing is that at the net revenue fixed percentage on net sales right. So in theory if we were to know the percentage you were getting we would be able to back into sort of the realized top line revenue for Novartis, right?

Mihael Polymeropoulos

Correct.

Operator

And at this time, I would now like to turn the call over to Dr. Polymeropoulos for closing remarks.

Mihael Polymeropoulos

Thank you. That concludes this conference call. We thank you very much for your interest and support for Vanda and we look forward to speaking with you again soon.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.

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