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Vanda Pharmaceuticals Inc. (NASDAQ:VNDA)

Q2 2008 Earnings Call Transcript

August 5, 2008 10:30 am ET

Executives

Steve Shallcross – SVP, CFO and Treasurer

Mihael Polymeropoulos – President and CEO

Analysts

Corey Davis – Natexis

David Moskowitz – Caris & Company

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Vanda Pharmaceuticals conference call. My name is Carmen; I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, ladies and gentlemen, this conference call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Steve Shallcross, Chief Financial Officer. Please proceed.

Steve Shallcross

Thanks, Carmen. Good morning and thank you for joining us to discuss Vanda Pharmaceuticals second quarter 2008 performance. Our second quarter 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 September 4.

Joining me on today's call is Dr. Mihael Polymeropoulos, our President and CEO. Following my introductory remarks, Dr. Polymeropoulos will update you on recent events. Then I will return to comment on our financial results for the second quarter and discuss our 2008 financial guidance before opening the line for your questions.

Before we proceed, I’d like to remind everybody that various statements we make on this call will be forward-looking statements within the meaning of federal securities laws. Words such as, but not limited to, believe, 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 on current expectations that involve changes in circumstances, assumptions, and uncertainties and other risks. These risks are described in the Risk Factors section of our quarterly report on Form 10-Q for the quarter ended March 31, 2008, which was available on the SEC’s 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.

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

Mihael Polymeropoulos

Good morning. And thank you very much for joining us. First on iloperidone, our compound for the treatment of schizophrenia, we recently reported that we received a non-approvable letter from the FDA. We remain surprised and disappointed by the decision as we continue to believe that iloperidone could become a great option for patients with schizophrenia, a debilitative disease.

We have now filed with the FDA our intent to amend the NDA in order to extend the review cycle and maintain the application active. We have also requested a meeting with the agency to fully understand the decision and potential options. It is our expectation that this meeting with the FDA will take place within the next month. We’ll inform you if and when any material progress is made in this subject. In the meantime, any major iloperidone activity has been placed on hold pending further review.

In June, we also reported positive results for tasimelteon Phase III study in patients with chronic insomnia. Tasimelteon significantly improved the ability of patients to fall asleep and this action continued for the four-week duration of the study. Given the versatility of the compound, we have the option to proceed with either chronic insomnia or a CRSD/jet lag type indications. We are now in the process of finalizing the clinical development plan, which will be required for an NDA filing.

I will now turn the call over to Steve to discuss our financial results. Following his comments, I will then provide some concluding remarks before opening the call for your questions. Steve?

Steve Shallcross

Thanks, Mihael. R&D expenses for the quarter totaled $5.5 million compared to $11.1 million in the first quarter of 2008 and $7.2 million in the second quarter of 2007. The decrease in R&D expenses in the second quarter of 2008 relative to the first quarter of 2008 is primarily attributable to lower cost and the Phase III tasimelteon chronic primary insomnia clinical trial to which Vanda reported top-line results in June of 2008. The decrease in R&D expenses in the second quarter of 2008 relative to the second quarter of 2007 is primarily attributable to lower clinical trial costs in the second quarter of 2008 versus the costs from trials conducted in the second quarter of 2007.

General and administrative expenses totaled $8.5 million in the second quarter of 2008, down from $9.0 million in the first quarter of 2008 and up from $7.1 million in the second quarter of 2007. The decrease in G&A expenses in the second quarter of 2008 relative to the first quarter of 2008 is primarily due to lower employee stock-based compensation expense. Included in the second quarter G&A expense is approximately $2 million of pre-commercial launch charges for iloperidone. All commercial activities for iloperidone have been suspended. The increase in G&A expenses in the second quarter of 2008 relative to the second quarter of 2007 is primarily due to increased pre-commercial activities for iloperidone, as previously discussed.

Employee stock-based compensation expense recorded in the second quarter of 2008 was $4 million. Of the $4 million of non-cash charges, about $700,000 was recorded in R&D expenses and $3.3 million was recorded in G&A expenses. For both the first quarter of 2008 and second quarter of 2007, total stock-based compensation was $5.1 million. The decrease in stock-based compensation from the second quarter of 2008 compared to the first quarter of 2008 and the second quarter of 2007 is primarily due to lower fair market value of options granted in 2008.

Net loss for the second quarter of 2008 was $13.5 million. This compares to a net loss of $19.2 million in the first quarter of 2008 and $16 million in the second quarter of 2007.

Cash and marketable securities decreased by $11.4 million during the second quarter of 2008. Changes included $13.5 million of net losses and decreases in accrued R&D expenses and accounts payable of $0.9 million, net increases in prepaid expenses of $0.9 million, fixed asset purchases of $0.3 million offset by approximately $4.1 million in non-cash depreciation, amortization, and stock-based compensation expenses and net decreases in other working capital of about $100,000.

Vanda's cash, cash equivalents, and marketable securities at the end of the second quarter of 2008 totaled approximately $65.6 million compared to approximately $93.2 million as of December 31, 2007.

Just a brief comment on financial guidance. As we’ve discussed, we’ve placed all iloperidone-related activities on hold and are undertaking steps to minimize our cash burn. We are also evaluating all our options for our development pipeline and will provide guidance as soon as our plans are more definitive.

At this time, I’ll turn the call back to Mihael.

Mihael Polymeropoulos

Thank you, Steve. Again, we will have additional information, and as we do, we’ll update you on our plan. I would like to ask the operator now to address any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Corey Davis from Natexis. Please proceed.

Corey Davis – Natexis

Thanks very much. I guess in the meaning that you have when you have it with the FDA, what’s ambiguous about the letter that could get resolved at that meeting? It seemed pretty clear to me that Mr. Temple wants another active controlled study comparing it directly to Risperdal, where you would have to be at least efficacious? Is there – A, I can’t think of a precedent for this, can you? And B, is this a game changer? And C, do you think you can change his mind?

Mihael Polymeropoulos

Thank you, Corey. First of all, I want to clarity that this meeting is not a part of the formal appeals process, but rather an informal attempt to understand the contents of the letter and of course present Vanda’s counterpoint. Just to review things a little bit about the letter. The FDA while in some different ways has looked at our study, they conclude that we have to post the study. And in fact, both of those are in one study, 12 and 24 are posted, and of course the last study had the single dose, 24 milligrams, is posted as well. We also agree that in the last study where with discussions with the FDA, we included Geodon as the active comparator. They agree that the results are similar. And just to remind you that this discussion and agreements on Geodon came as main discussions with the FDA to understand the competitive effect of iloperidone using the proper comparator. In the prior studies, we were (inaudible) risperidone. Risperidone is a drug that has a different early profile. What I mean by that is that while iloperidone requires a titration period, risperidone requires a very small titration period. And also while iloperidone has a mild satisfactory profile, risperidone has potentially unblinding side effects. All this leads to bias of the results by patients who drop out in the first or second week of the study. So we are confident that iloperidone given in this study signals the potential of being of equal effectiveness with risperidone. And this is why we want to sit down with the FDA to understand why are they reaching a different conclusion. Now, on the requirements, yes, they require that another active study with placebo and another comparator, and as I said, for example, the effect of risperidone should be run. And again, we want to understand what do they think that we will learn about the action of this compound from that additional study that we don't already know. So, our expectation for that meeting is to clarify the methodology and the premise (inaudible) conclusions and offer Vanda's counterpoint. Another part of your question was whether we think this signifies some change in policy or else. We don't know of any change in any policy, there has not been any guidance. And in fact, this letter does not give us any instructions on what the expectations should be for another study with placebo as a comparator. So, this is another reason that we want to sit down with the FDA and better understand what went on in reaching that conclusion.

Corey Davis – Natexis

Okay. That’s all I had. Fair enough. Thanks.

Mihael Polymeropoulos

Thanks, Corey.

Operator

Our next question comes from the line of David Moskowitz from Caris & Company. Please proceed.

David Moskowitz – Caris & Company

Yes, thanks. Good morning.

Mihael Polymeropoulos

Hi, David.

David Moskowitz – Caris & Company

Okay. Just last question on iloperidone. I believe in the contract that you have with Novartis, possibly Titan, their provisions that if the product doesn’t get approved, there is a point where – point of no return where the product has to be returned, those rights go back to the parent company. So, can you speak to how much longer you would have with the compound for everything reverts back to the originator companies? The other questions would be on the burn rate. Could I get a good idea of what R&D and SG&A would look like for the third quarter, perhaps the remainder of the year, which you guys expect to have in cash by the end of the year? And then also could you comment on any partner discussions with regard to tasimelteon? Thanks.

Mihael Polymeropoulos

Right. Okay. Two things. The contract, secondly cash burn, and third (inaudible). I’m going to address the one in three and I will let Steve talk to you about cash burn and expectations. On the contract, I’m not familiar with the detailed language, but we're not at that point. Activities with iloperidone, the fact that we are pursuing the potential amendment with the NDA keeps iloperidone fully active in our hands, and I’m sure our partners and the originators for the compound are very confident that our efforts are the correct ones. On the partners, as you can imagine, there is today no activity on the partnership front with the compound that has received a rejection letter. We know that if there was a resolution of this very hard decision, right now, that we could reinitiate potential partnership discussions, but there should not be any expectation that any discussion or any – in the active form today.

David Moskowitz – Caris & Company

I’m sorry, that question was targeted toward tasimelteon partnership studies.

Mihael Polymeropoulos

Oh, I’m sorry. On tasimelteon, as I said here and before that we would make a contextual decision. Now that we have a one approval of iloperidone and the additional financing for the company, as you can understand, is prohibited. What we are doing is we're reformatting the clinical development plan to pursue an indication that we can possibly arrive at an NDA if possible with existing funds. It is too early for us to say that, not just because of our own planning and budgeting, but also in discussions that we’ll immediately have with the agency. So, again, before all this is clarified, I would not expect any partnerships to occur. I'll turn it over to Steve to give the cash burn answer.

Steve Shallcross

So, as we’ve discussed, we’ve put our iloperidone related and clinical programs on hold, pending the outcome of what we find out in this FDA meeting. And once we have little more clarity around that, I think we’ll be able to go forward and give you some more definitive guidance. But specifically as it relates the next couple quarters, if you would take our overhead burn as it exists today, you can use a number of about $5.5 million as a quarter-to-quarter burn. In addition, what you might want to factor in for the third quarter is approximately $2 million of R&D run-out for the manufacturing and preclinical activities that are running down and then some commercial costs that are running down as well. So, by the fourth quarter and going forward, about $5.0 million to $5.5 million of cash burn, and then as you could calculate out, that gives us a relatively significant runway, given the fact that we had over $65 million of cash at the end of June.

David Moskowitz – Caris & Company

So that was – just to clarify, that’s $5.0 million to $5.5 million of burn in the fourth quarter in its entirety. And I assume that that means some very low level of R&D and possible overhead reduction between now and then?

Steve Shallcross

Correct.

David Moskowitz – Caris & Company

Okay. And just to clarify on the iloperidone and the potential meetings to have, am I to understand there is no money being spent going forward on iloperidone at this point?

Mihael Polymeropoulos

Yes. As Steve was explaining, we're winding down all incremental activities and contractual commitments that we had with a very little run-out that he explained. There is no major clinical activity. There will be some small spend on manufacturing run-out and a small spend on the metabolite cost and benefit [ph] study that is ongoing.

David Moskowitz – Caris & Company

And based on the numbers that Steve just went through, it doesn’t sound like there is really any R&D ongoing. And you’ve just mentioned that you may take tasimelteon forward yourself. So I’m trying to reconcile that. Are you spending on tasimelteon or are you waiting for some other event?

Mihael Polymeropoulos

Yes. As we said, we reported in June, so we're wrapping up that trial now. And we will be communicating very soon with the FDA on our plan forward for full development plan. The intent is to examine all options, which include continuing the development of VEC-162. And what we’re trying to do here is trying to understand from the possible indications that we can pursue, is there an indication that can allow Vanda to move to an NDA filing with existing cash or close to the existing cash. And that exercise ongoing now and we need the FDA's input. So while the cash burn that Steve had explained of $5.5 million does not of course include the clinical programs. You can imagine that the burn will increase if the clinical development program ensues. I cannot give you guidance today, but we hope that very soon we’ll reach the final conclusion of the path forward and communicate that.

David Moskowitz – Caris & Company

Okay. Thanks very much.

Mihael Polymeropoulos

Thanks, David.

Operator

Sir, we have no further questions. I would like to turn the call back over to management for closing remarks.

Mihael Polymeropoulos

Thank you. Let’s conclude the second quarter investor call. We thank you for your interest and support to Vanda. And we look forward to speaking with you soon.

Operator

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day.

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