Vanda Pharmaceuticals, Inc. (NASDAQ:VNDA) Q2 2016 Results Earnings Conference Call July 27, 2016 4:30 PM ET
Mihael Polymeropoulos - President and Chief Executive Officer
James Kelly - Senior Vice President, Chief Financial Officer and Treasurer
Jason Butler - JMP Securities
Difei Yang - Brean Capital
Welcome to the second quarter 2016 Vanda Pharmaceuticals, Inc. earnings conference call. My name is Katie and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
And I will now turn the call over to Jim Kelly, Vanda’s Senior Vice President and Chief Financial Officer. Please go ahead, sir.
Thanks, Katie. Good afternoon and thank you for joining us to discuss Vanda Pharmaceutical’s second quarter 2016 performance. Our second quarter 2016 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 Web site.
Joining me on today's call is Dr. Mihael Polymeropoulos, our President and CEO, and Gian Piero Reverberi, our Chief Commercial Officer.
Following my introductory remarks, Dr. Polymeropoulos will update you on our ongoing activities. Then I will comment on our financial results before opening the lines to your questions.
Before we proceed, I’d 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 Risk Factors and Management 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, 2015 and on our subsequently-filed quarterly reports on Form 10-Q, which are available on the SEC's EDGAR system and on our Web site. 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. Mihael Polymeropoulos.
Thank you, Jim. Good afternoon, everyone, and thank you very much for joining us. During the second quarter of 2016, Vanda’s commercial business continued to demonstrate strong progress and a steady growth during this period.
With impending HETLIOZ launch in Germany and multiple products with clinical trials planned and ongoing, it is clear that Vanda is executing across a broad range of value-creating activities. Our ability to deliver commercial excellence and R&D innovation will define both our future growth and the impact we will have on the lives of our patients.
I will start with HETLIOZ. In the US, HETLIOZ net product sales grew to $17.5 million in the second quarter of 2016, an 8% increase compared to the first quarter. We continue to see strong new prescription demand and our patients in therapy continued to increase, consistent with our expectations.
We’re optimizing our internal commercial engine to improve the effectiveness of our new patient acquisition efforts and to provide a better support to our patients. This includes the strengthening and optimization of our BOOST program, which is our field-based patient acquisition program, as well as improving our services towards expedient reimbursement support.
In Germany, we’re preparing for a third quarter launch of HETLIOZ. Our Non-24 patient identification strategy will build upon relationships with German blind advocacy groups and blind rehabilitation service groups. Our 12-person German commercial team will cultivate these relationships and assist the clinical community in techniques to better diagnose and treat patients with Non-24.
In other European markets, the implementation of our HETLIOZ price and reimbursement strategy is underway. France remains a priority market as we have over 20 patients currently on therapy in that country in an open label safety expansion of the clinical program.
On Fanapt, US Fanapt net product sales were $18.6 million for the second quarter of 2016, a 9% increase compared to the first quarter. During the second quarter, prescription level data suggest a stabilization of demand, especially in the 50 territories where we launched our field force at the end of 2015.
On the regulatory front, the US FDA approved in May Vanda’s Supplemental New Drug Application for Fanapt, modifying and expanding the prescribing information for the use of Fanapt as a maintenance treatment for schizophrenia in adults.
In addition, the FDA granted three years of marketing exclusivity for the changes related to the approval of the sNDA. We believe the strength of this data underscores the efficacy profile of Fanapt in the treatment of patients with schizophrenia. We believe that Fanapt can be particularly useful in treating patients with schizophrenia that may have developed akathisia with prior antipsychotic treatments. For a full year’s prescribing information, I will refer you to www.fanapt.com.
US Fanapt exclusivity is protected by ten Orange Book listed patents that include the composition of matter patent which expires in November of this year and nine additional patents with expiry date that range from 2025 to 2031. There are many legal activities ongoing related to five Vanda filings. And a near-term significant event is the Delaware Court’s upcoming decision on the ongoing litigation proceedings with Roxane, now called Hikma, specific to the composition of matter patent which expires this year and the ‘610 patent which expires in 2027. We expect this decision to occur in the late summer or fall of this year.
Research and development. Vanda’s corporate strategy is to develop novel therapies addressing unmet medical needs. For HETLIOZ, enrollment in the Smith-Magenis Syndrome open label interventional study is ongoing. To remind you, SMS is a genetic disorder that occurs in one in 15,000 to 25,000 births or is prevalent of approximately 15,000 people in the US. It is the result of a chromosomal deletion and individuals with SMS present with a severe sleep disorder.
We see the development of the SMS indication as an important complement to our Non-24 pediatric orphan business with tasimelteon. HETLIOZ has received orphan designation from the FDA for SMS and we’re working to complete the European orphan designation filing for HETLIOZ at this time. An orphan label study with tasimelteon in patients with SMS is ongoing. A placebo-controlled Phase III study is expected to begin later this year.
The Pediatric Non-24 pharmacokinetics study of the HETLIOZ liquid formulation is currently enrolling. The Phase III study is expected to begin in 2017.
The screening of patients for Jet Lag Disorder Phase II proof-of-concept study began during the second quarter of 2016. Results from this proof-of-concept study are expected in the first half of 2017.
Tradipitant is our neurokinin-1 receptor antagonist that is presently in Phase II development for both chronic pruritus and gastroparesis. Both indications reflect an opportunity to address highly unmet medical needs in specialty markets that would be well served with a novel mechanism of action drug.
Enrollment in a Tradipitant Phase II proof-of-concept study for the treatment of chronic pruritus in patients with atopic dermatitis is ongoing with a total study enrollment goal of 150 patients. Results from this study are expected in the first half of 2017.
A Tradipitant Phase II proof-of-concept study for the treatment gastroparesis is expected to begin enrolling patients in the fourth quarter of 2016 and results are expected in the second half of 2017.
On Trichostatin A, we’re progressing an IND filing in the first half of 2017.
Finally, on iloperidone, our EU regulatory application is currently under review with an expected action in the first half of 2017.
So I’ll now update you on our financial results. Total revenue for the second quarter of 2016 was $36 million, an 8% increase compared to $33.3 million in the first quarter of 2016 and a 31% increase compared to $27.6 million in the second quarter of 2015.
HETLIOZ net product sales grew to $17.5 million in the second quarter of 2016, an 8% increase compared to $16.2 million in the first quarter of 2016 and a 74% increase compared to $10 million in the second quarter of 2015.
As of June 30, 2016, the specialty pharmacy channel held less than two weeks of inventory as calculated based on trailing demand. Units dispensed to patients by the specialty pharmacies in the second quarter grew by 10% over prior quarter and exceeded units sold by Vanda to the specialty pharmacy channel by over 40 units. The approximate net product sales value of this inventory de-stocking was approximately $500,000.
Fanapt net product sales grew to $18.6 million in the second quarter of 2016, a 9% increase compared to $17.1 million in the first quarter of 2016 and a 6% increase compared to $17.6 million in the second quarter of 2015.
You will see in our press release Vanda is offering non-GAAP financial information. We do so because we believe that the non-GAAP financial information can enhance an overall understanding of our financial performance when considered with the GAAP figures. During 2015 and 2016, Vanda non-GAAP net loss excludes stock-based compensation and intangible asset amortization.
On a non-GAAP basis, during the second quarter of 2016, Vanda recorded non-GAAP net income of approximately $400,000 as compared to a non-GAAP net loss of $7.1 million for the first quarter of 2016 and compared to a non-GAAP net loss of $400,000 for the second quarter of 2015.
On a non-GAAP basis, for the second quarter of 2016, Vanda recorded non-GAAP operating expenses, excluding cost of goods sold, of $29.3 million compared to $34.6 million in the first quarter of 2016 and $22.3 million for the second quarter of 2015. The primary driver of the sequential decline in the second quarter of 2016 was a decrease in legal expenses related to the Fanapt litigation.
Vanda’s cash, cash equivalents, and marketable securities, referred to as cash, as of June 30, 2016, were $136 million compared to $138.3 million as of March 31, 2016.
Vanda reiterates its prior guidance with an update to stock-based compensation guidance and expects to achieve the following financial objectives in 2016. Net product sales from both HETLIOZ and Fanapt of between $143 million and $153 million, HETLIOZ net product sales of between $73 million and $78 million, Fanapt net product sales between $70 million and $75 million, non-GAAP operating expenses excluding cost of goods sold of between $125 million and $135 million.
Non-GAAP operating expenses excludes intangible asset amortization expense of $10.9 million and stock-based compensation expense of between $9 million and $11 million. Prior guidance for the stock-based compensation was between $9 million and $11 million. The new guidance is between $8 million and $10 million.
Year-end 2016 cash is expected to be between $123 million and $143 million.
And with that, I’ll turn the call back to Mihael.
Thank you very much, Jim. At this time, we will be happy to address any questions you may have.
Thank you. [Operator Instructions] And our first question comes from Jason Butler from JMP Securities. Please go ahead.
Hi. Thanks for taking the questions and congrats on the quarter. Just first on HETLIOZ, Mihael, you discussed the optimization – commercial optimization strategies you have. Can you today, or at some point in the future, will you be able to help us quantify how those optimization efforts are having result either in terms of revenue or on the expense lines?
Certainly. Maybe first I can say what are the areas that were optimizing. First of all, I suggested that one of the optimizations is in the field, identifying new patients in the programs that we’ve called BOOST. These are programs that educate blind people on everyday activities and we take the opportunity to educate them on Non-24 and given the opportunity to opt in, learn more and eventually, if needed, be treated. What we have decided is to build a small group, about six or so, of nurse educators that will be dedicated to deliver these programs, creating efficiencies in the identification of patients in the field. That’s part one.
Part two that relates to the reimbursement support, we continuously strive to decrease the time to dispense the first crate and optimize the rate of refills. And just to remind that when we started off, we experienced quite long intervals until the first script was filled of 12 weeks or more. And now, for a significant portion of our scripts are being filled in a much shorter time. I'm not ready to discuss and quantify, but certainly we see significant improvements.
And the other area of the rate of refills, although refills are quite good, especially after the first six months, rates of refills are upwards of 95%, we still strive to make sure that all patients are aware of the timing of their refills and we continue that process, maintaining the base of our patients.
So that’s pretty much the detail we can offer at this time, Jason.
No, that’s very helpful. Thank you. And then, just on Fanapt, I guess, two questions here. First of all, you saw a pretty attractive quarter-over-quarter increase in sales, and yet IMS data was pointing to a sequential decline. Can you just help us consolidate that?
And then, you mentioned that you were seeing overall a stabilization, especially in the territories where you had promotional efforts. Is there anything about – that you’ve identified in those territories that you think is predictive of efforts that you could expand to other territories or better identify which territories to expand to and increase promotional efforts?
Yeah. The first part of the question that has to do with discrepancy that – revenue is up pretty significantly of about 9% where IMS and Symphony Health script counts for the quarter are down of about 3% or so. We really don't know the explanation because we don't see any special stocking that explains this. And actually, we see that sell to wholesalers and sell-through to retail is up, consistent with the revenue that we see.
But, of course, you’re dealing with small numbers. IMS and Symphony Health predict the numbers. And, therefore, the truth most probably is somewhere in the middle, meaning that, yes, we’re towards stabilization.
And just to address now, specifically, your question, we're very excited about the early signs of effectiveness of our 50-people sales force. In that, in the territories of the 50, we see, based on IMS and Symphony Health, a decline of less than 1% in the promoted territories. And that compares with a continuous decline in the white space. And just to give you an order of magnitude, our 50 territories attempt to address about 70% of the prescribing universe. So the white space is 30%. And with that, the lessons learned is that promotion does work and it is received well. Our sales force is doing a great job. We’ll continue to try to improve our message and effectiveness of the sales force. But, of course, it gives us guidance what could we do in the future to even furthermore significantly improve things. And certainly, increasing the size of the sales force in the 50 territories, improving our frequency, but also improving reach and frequency in the white space is something certainly that we’re thinking very carefully through.
So just to be clear, we’re faced with a very important decision that’s come down from the Delaware Court in the next couple of months, which has the potential of extending our exclusivity for Fanapt for an additional 11 years. So we want to be totally prepared to receive the good news. And part of that is certainly optimize our commercial effort and drive the Fanapt revenue.
Great. That’s really helpful. And just last thing, very quickly, I just want to make sure I have this right from your prepared comments, can you just reiterate what the magnitude of stocking change for HETLIOZ was?
Sure. And I’ll speak to actually both Fanapt and HETLIOZ. As Mihael said, when you look at the sequential growth in Fanapt, it’s about $1.5 million, about $300,000 was an increase in stocking at the wholesaler level, about $1.2 million was just pure retail demand increase. And so, we were saying what you were saying, which is, this is out of sync with the IMS, but it's real demand coming from the pharmacy level.
Right. Back to HETLIOZ. HETLIOZ, we saw that about $500K in value, more was dispensed to patients than was purchased from us in the quarter. And it was all over 40 units.
Okay, great. Thank you very much for taking the questions and congrats again on the quarter.
Yeah. No problem.
And our next question comes from Difei Yang from Brean Capital. Please go ahead.
Hi. Good afternoon. Thanks for taking my question. Just a couple. So could you talk to us about the sales force size versus eventually your – how you think about the market opportunity for Fanapt, let’s say, three years down the road. So we sort of know it is difficult to support one product – to support one single sales force with one product. So you must be seeing significant upside to justify the investment in the sales force.
Thank you. So we’re talking about Fanapt, and just to recap, Difei, the question is, are we thinking of alternatives for the sales force to improve its net contribution. Just to be very clear that with the current sales force and the current OpEx, Fanapt is quite a very big, profitable product as it is today. Of course, sales forces can carry more than one product and they can optimize. However, with the kind of performance which we believe can be improved, Fanapt is a quite profitable asset in our hands.
And just to remind everybody, as we move beyond November 2016, there are some significant things that change in the economics of the Fanapt. To remind everybody that until November 15 of 2016, Vanda has a royalty obligation to third parties of about 23%. That royalty obligation goes down to 9% beginning November. And three years later, it goes even further down to 6%. So under the current economics, it's actually – Fanapt is a profit center. It would become even more in the future. But, of course, at all times, we look how to improve both the top line and the marginal of the product.
Yeah, thank you. That’s very helpful. So just changing the subject to the R&D pipeline and you have Tradipitant that’s entering into Phase II with Q2 – Phase II trials ongoing in Q2. How is the thinking behind how you identify the – recruiting the patients, gastroparesis and the itchiness – the skin itchiness? And what data do you have that you feel comfortable to move forward?
Excellent question. And thank you for giving me the opportunity to discuss a little bit more about Tradipitant where we actually have a lot of hope that our clinical results next year may suggest actually a clear path forward.
Let me start with chronic pruritus. To remind everyone, we ran a Phase II proof-of-concept study last year and we discussed the results of that. That study failed to meet the primary endpoint, which was a visual analog scale in change of pruritus from baseline. However, what was very interesting, we found out that in a pharmacokinetic – pharmacodynamic association, patients that had higher amount of drug in the bloodstream at the time of the evaluation were the ones with the highest benefit of Tradipitant. That allowed us to redesign the program and go to the Phase II we’re on today with 150 patients administering Tradipitant twice a day, and that is the biggest difference between the two studies.
There is a lot of evidence in the scientific literature that neurokinin-1 receptors are involved in the skin transmission of itch potentially through C fibers and the action of substance P, which is the natural neuropeptide binding the neurokinin-1 receptors. So the principle here is Tradipitant, a known antagonist of the neurokinin-1 receptor, will block substance P activity and the transmission of itch from skin centrally. So that is on chronic pruritus.
We’re very excited about the second program also on gastroparesis. Gastroparesis is a highly unmet medical need. Gastroparesis refers to the inability of the stomach to empty its contents, leading to significant suffering, chronic nausea, vomiting, abdominal pain, fullness, and a significant impairment in the quality of life of these patients. Today, there are not very effective treatments for gastroparesis that affects hundreds of thousands of patients in the US.
The principle there is that, again, neurokinin-1 receptors that line the stomach are extremely important in the peristaltic movements of the stomach, but also in the cardinal symptom of gastroparesis, which is nausea. The FDA issued a guidance last year to facilitate the development of drugs, and in that guidance suggested a path forward for any developers of drugs for gastroparesis. [indiscernible] that it will be sufficient to demonstrate improvement in one of the cardinal symptoms of gastroparesis; in our case, it will be nausea, if you – so at the same time that you don't disturb the other treatments.
And just to remind you that the concept of neurokinin-1 receptors blockade, centrally acting to prevent nausea is a concept that has been exploited now in a couple of drug programs in chemotherapy-induced nausea and vomiting. So we believe there is enough scientific and proof-of-principle evidence that both in pruritus and gastroparesis that a neurokinin-1 receptor antagonist with the properties of Tradipitant could be beneficial.
Thanks so much for explaining these in detail. Just a quick follow-up on gastroparesis. Do you see this drug potentially will improve stomach motility or GI tract motility or is it primarily targeting the nausea symptom of that disease?
Thank you. That’s an excellent question. And we sure hope that it could do both, that it can improve the motility, emptying the gastric contents, and the relieve nausea. However, this is a very complex field, maybe beyond this call, where even the FDA in their guidance admit that improved motility doesn’t always correlate with symptomatic relief, which is actually what the patients are asking for. And gastroparesis, it is correct that it is – part of the diagnosis is actually – this gastric motility scintigraphy studies. But neither would suffice, so that you improve motility nor does the FDA believe that this is a critical important clinical factor on which drug development is based.
However, our belief is that both could be affected, but it is very likely that a proof-of-concept study will look strictly on the clinical side of result.
Thanks. I promise this will be my last question on gastroparesis. So just to confirm, you’re working on the RO formulation.
Okay, thank you.
And at this time, we have no further questions. I will now turn the call back to Dr. Polymeropoulos for closing remarks.
Thank you very much all for joining us and your support of Vanda. And we wish you a good rest of the summer.
Thank you, ladies and gentlemen. This concludes today’s call. Thank you for participating and you may now disconnect.
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