Vanda Pharmaceuticals, Inc. (NASDAQ:VNDA) Q4 2017 Earnings Conference Call February 14, 2018 4:30 PM ET
Jim Kelly – Executive Vice President and Chief Financial Officer
Mihael Polymeropoulos – President and Chief Executive Officer
Jason Butler – JMP Securities
Sarah James – Piper Jaffray
Matthew Andrews – Jefferies
Chris Liu – Oppenheimer
Welcome to the Fourth Quarter 2017 Vanda Pharmaceuticals Incorporated Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.
I will now turn the call over to Mr. Jim Kelly, Vanda’s Executive Vice President and Chief Financial Officer. Mr. Kelly, you may begin.
All right. Thank you, Hilda. Good afternoon and thank you for joining us to discuss Vanda Pharmaceuticals fourth quarter and full year 2017 performance. Our fourth quarter and full year 2017 results were released this afternoon and are available on the SEC EDGAR system and on our website www.vandapharma.com. In addition, we’ll be providing live and archived versions of this conference call on our website.
Joining me on today’s call is Dr. Mihael Polymeropoulos, our President and CEO. Following my introductory remarks, Mihael 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 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. 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’s 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, 2016, and on quarterly report on Form 10-Q for the quarter ended September 30, 2017, which are available on the SEC’s EDGAR system and on our website. 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 very much, Jim, and good afternoon, everyone. I will begin with a commercial performance update for the fourth quarter and the full year 2017. HETLIOZ revenue was $25 million in the fourth quarter, showing significant growth driven by both the existing patient-directed physician strategy and the new HETLIOZ psychiatrist initiative, which we refer to as PDP and HBI, respectively. We expect this growth volume to continue in 2018, and we are forecasting full year revenue for HETLIOZ between a $108 million and $118 million.
To briefly touch on Fanapt. The fourth quarter was an exceptional quarter. The first quarter that the business sold quarter-over-quarter prescription growth since mid-2014. We remain cautious on the growth trajectory in 2018, forecasting revenue between $72 million and $82 million. For Europe, our long-term HETLIOZ in the EU is progressing after the successful price negotiations in Germany. We are in the process of preparing the regulatory submissions for France and Italy.
Now I would like to update you on our clinical pipeline and upcoming milestones. First, I will discuss tradipitant in atopic dermatitis and gastroparesis, two large indications with significant unmet medical need. I will begin with atopic dermatitis. As we reported previously, tradipitant has shown significant effect on measures of itch and measures of disease severity in patients with atopic dermatitis in an eight week placebo-controlled study. This are very exciting results for the field of atopic dermatitis that is recently been the focus of significant work in the development of new therapeutics by a number of companies.
Our work and the work of others is a potential in the near future to provide patients with atopic dermatitis with effective and safe oral systemic treatments. Current treatments include emollients, steroids, calcineurin inhibitors and PD4 inhibitors. However, none are administered as an oral systemic treatment. The only systemic treatment available is Regeneron and Sanofi’s Dupixent in injectable agent for patients with more severe forms of the disease.
We are now preparing to initiate our Phase III pivotal program as well as conduct an end of Phase II meeting with the FDA to clarify final study design and endpoint selection. As you are aware, we are also currently testing tradipitant for the treatment of patients with gastroparesis. A gastrointestinal disorder, gastroparesis affects hundreds of thousands of Americans, carries significant morbidity and mortality and represents a significant unmet medical need.
The current studies being conducted in Phase II sites across the U.S., and we are focused on recruitment with the goal of reporting results of this study by end of year. As there are few treatment options for these patients, a demonstration of a therapeutic effect by tradipitant could represent a significant advance for patients with this disorder as well as a large commercial opportunity for Vanda. In summary, the tradipitant program with studies in dermatologic and gastrointestinal disorders present shorter milestones that can be important contributors to value creation for the company.
I would like now to highlight a few items in our early pipeline before I return to upcoming milestones in the life cycle management of HETLIOZ, our treatment for Non-24 hour sleep/wake disorder. We are progressing with our early oncology program on Trichostatin A, an HDAC inhibitor developed to treat hematologic and other malignancies. A Phase I study is expected to begin later this year. We are also making progress on the CFTR activator program with compound K for the treatment of dry eye. Dry eye is a very common condition, which is currently addressed with immunomodulators namely Restasis and Xiidra.
Compound K can offer an alternate to this immunomodulatory anti-inflammatory treatment and address dry eye symptoms of both inflammatory and non-inflammatory etiology. Compound K works as a membrane chloride channel allowing for transfer of both in the extracellular space creating a wet film of water and thus reversing the symptoms of dry eye.
Early studies in animal models have confirmed that effect and have shown compound K to be well tolerated with minimum systemic exposure. We are currently working toward IND filing by year end in the initiation of human clinical trials next year.
Finally, I would like to discuss the progress on the lifecycle management of HETLIOZ. We have now completed the clinical jet lag program with a 25 patient proof-of-concept jet lag flight study across 5-hour and 8-hour time zones as well as a 320-patient study of an 8-hour jet lag model.
Results of these study are expected in the coming weeks. These studies along with previously reported positive Phase II and Phase III studies in models of jet lag will form the efficacy evidence to be submitted to the FDA in the supplemental new drug application. I would now turn the call to Jim.
Thank you, Mihael. I will now update you on our fourth quarter 2017 and full year 2017 financial results. Total revenue for the full year 2017 was $165.1 million, a 13% increase compared to $146 million for 2016. Total revenue for the fourth quarter of 2017 was $44.3 million, a 7% increase compared to $41.3 million in the third quarter of 2017 and a 16% increase compared to $38.2 million in the fourth quarter of 2016.
HETLIOZ net product sales grew to $90 million for the full year 2017, a 26% increase compared to $71.7 million for 2016. HETLIOZ net product sales grew to $25 million in the fourth quarter of 2017, a 12% increase compared to $22.3 million in the third quarter of 2017 and a 30% increase compared to $19.3 million in the fourth quarter of 2016. There were more than 700 HETLIOZ patients on therapy at the end of 2017. As of December 31, 2017, there are specialty pharmacy channel held less than three weeks of inventory as calculated based on trailing demand.
For Fanapt net product sales grew to $75.1 million for the full year 2017, a 1% increase compared to $74.3 million in 2016. Fanapt net product sales of $19.3 million in the fourth quarter of 2017 reflect a 1% increase compared to $19.1 million in the third quarter of 2017, and a 2% increase compared to $18.9 million in the fourth quarter of 2016. Fanapt prescriptions, as reported by IQVIA, formerly known as Quintiles IMS were 28,159 in the fourth quarter of 2017, a 1% increase compared to the third quarter of 2017, which represents the first quarter to demonstrate sequential growth since the second quarter of 2014. Consistent with IQVIA Fanapt of prescription trends, sales from the wholesalers to the retail channel also grew by 1% in fourth quarter as compared to the third quarter of 2017.
You will see in our press release that 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 GAAP figures. During 2016 and 2017, Vanda non-GAAP net income and net loss excludes stock-based compensation and intangible asset amortization.
On a non-GAAP basis, during the full year 2017, Vanda recorded a non-GAAP net loss of $3.4 million, compared to a non-GAAP net income of $1.5 million for the full year 2016. During the fourth quarter of 2017, Vanda recorded non-GAAP net income of $1.4 million compared to a non-GAAP net income of $3.6 million during the same period during 2016.
On a non-GAAP basis for the full year 2017, Vanda recorded non-GAAP operating expenses, excluding cost of goods sold, stock-based compensation and intangible asset amortization of $151.9 million compared to $120.4 million for 2016. Non-GAAP research and development expenses for the full year 2017 grew by $10.3 million.
HETLIOZ and tradipitant clinical activities, plus new CFTR program were the primary contributors to growth year-over-year. The expansion of the U.S. Fanapt field force was the primary contributor to the $21.2 million growth in non-GAAP SG&A compared to the prior year.
On a non-GAAP basis, for the fourth quarter of 2017, Vanda recorded non-GAAP operating expenses of $38.4 million, compared to $38.5 million for the third quarter of 2017, and $29.4 million for the fourth quarter 2016. Vanda’s cash, cash equivalents and marketable securities referred to as cash as of December 31, 2017 were $143.4 million, representing an increase to the cash of $2.1 million during 2017.
Vanda expects to achieve the following financial objectives in 2018: net product sales from both HETLIOZ and Fanapt of between $180 million and $200 million; HETLIOZ net product sales of between $108 million and $118 million; Fanapt net product sales of between $72 million and $82 million; non-GAAP operating expenses, excluding cost of goods sold of between $163 million and $173 million. The primary drivers of the expected increase over the prior year are clinical investments, including studies of tradipitant and atopic dermatitis and gastroparesis.
Non-GAAP operating expenses exclude intangible asset amortization expenses of $1.7 million and stock-based compensation of between $11 million and $15 million. Year-end 2018 cash is expected to be between $115 million and $125 million. This includes the expected payments of $25 million milestone obligation based on cumulative HETLIOZ net product sales.
I’ll now turn the call back to Mihael.
Thank you very much, Jim. I will be happy to answer any questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Jason Butler from JMP Securities.
Hi. Thanks for taking the questions. Just a couple of quick ones. First, Mihael, can you talk a little bit about the dynamics you’re seeing in the market between – with HETLIOZ for the blind and the sighted populations? And just if you could briefly walk through what your strategy right now is with the sighted patients and what you’re seeing with reimbursement at this stage?
Of course. Thanks, Jason. First of all, just to give a little bit scale to HPI. We fully launched HPI with a full sales force promoting to psychiatrists beginning of October of 2017. So in this three months, over the last quarter, we saw a significant increase of the total scripts per month, which have more than doubled as compared to the monthly scripts seen before with the program which was based primarily on the Patient Directed Physician program, the PDP.
Just to clarify, Jason, in the past, some of the scripts were coming from sighted people as well. The difference is that in the HPI initiative, most of the patients are sighted. While we have seen a very significant increase in the scripts, we continue to work through the insurance network of prioritization appeals, et cetera. The rate of filled scripts for sighted people is lower than that of blind as insurance companies adjust and until they recognize that HETLIOZ is indeed approved for Non-24 regardless of the condition of blindness or being sighted.
So we remain optimistic that the fill rates for sighted people will continue to increase. And with that, patients that have been prescribed for Non-24, they will be able to see their prescription filled whether they are sighted or blind. As we have discussed before, the vast majority of blind patients with Non-24 have seen their scripts filled, albeit, with a delay through this insurance process. And we expect eventually that to be the same for sighted patients with Non-24. However, at this time, fewer than half the scripts for sighted people are being filled within the first 30 to 60 days.
Great. Thanks. And then on tradipitant. Can you just give us the big picture views on how you’re thinking about trial design endpoints, patient population, et cetera, for the Phase III trial? And atopic dermatitis right now versus what you did in the last Phase II trial?
Absolutely. So the tile you’re referring to will be a Phase III pivotal study likely with several hundred patients attempting to confirm the effects that we saw in the prior study. That study – the new study will enroll patients with atopic dermatitis of varying severity, from mild to severe, as we have done before. And we’ll attempt to confirm two things; the effect – the positive effect of tradipitant on improving pruritus and likely than the clinical endpoint will be an improvement in the Worst Itch Numeric Rating Scale.
But, of course, we would like to examine and confirm the effect of tradipitant in measures of disease severity. Just to remind everyone, we have seen tradipitant to have a significant and clinical meaningful effects on measures such as the total SCORAD scale, the objective SCORAD scale and the SCORAD 50, which is a category for measurement the proportion of patients that achieved 50% or greater improvements in SCORAD.
Of course, the secondary endpoints will be additional scales, including scales of function. And I remind you that in the prior study, again we saw a significant and meaningful effect in the Patient Benefit Index, a dermatology-specific scale. We are also considering examining the effect of tradipitant in the population of patients with higher levels of IgE, a known marker of atopy. As we have reported recently in several scientific meetings, we observed that patients with above-normal levels of IgE appear to have the highest relative benefit from tradipitant compared to placebo. And therefore, IgE levels can act as a useful enrichment strategy in the next study.
We’re, of course, considering that. And both these items, that is population selection and endpoint selection, will be the subject of a meeting with the FDA, hopefully in the very near future. In the meantime, we are gearing up to initiate this program and begin the study as soon as possible.
Okay. That’s great. And then just last question on jet lag. Can you just give us your thoughts on commercialization of that indication. Specifically, how will you build out a commercial infrastructure to detail that label expansion?
Yes. Happy to give some high-level ideas. But hopefully, Jason, in a few weeks, we’ll report good results. And it would be appropriate at the time to discuss in more detail the thought. However, as many know, jet lag is a condition experienced by the vast majority of travelers that travel across time zones. There are millions of people with the condition that affects not only sleep efficiency, but also next-day performance.
It is our intent, if the studies are positive and if eventually were approved in the supplemental NDA by the FDA to commercialize directly to traveler consumers. And, of course, all of us understand there are very, very specific ways to identify such consumers. And both where they are at the time they about to experience jet lag, but also the condition surrounding the travel. It is also very impressive that the U.S. government has continuous and annual statistical analysis of all the conditions that would produce jet lag giving us a plethora of data and definition of populations to work on.
Great. That’s helpful. Thanks for taking the questions.
We have a question from Charles Duncan from Piper Jaffray.
Thank you. This is Sarah on for Charles. So first of all for HETLIOZ, it sounds like the psychiatrist targeting initiatives have been going well so far. However, can you provide us some more color on the room for growth you see from the strategy ahead in 2018? And then what factors or indicators will you be tracking to that end?
Yes. Of course, we gave a guidance on the forecast of HETLIOZ for the year. And we are not changing anything on that yet. Of course, we’re working very hard to meet this target and hopefully exceed it. So what are these indicators that make us optimistic and what are the hurdles that we need to overcome to get there? The most promising part of the HPI strategy is the inception by psychiatrists. In that they have been able to identify and continue to identify patients with Non-24, who are candidates for HETLIOZ.
And as I said, Sarah, the number of prescriptions that we see now monthly are more than twice the prescriptions that we have seen monthly prior to the initiation of the HPI initiative. So the – there are two key questions that, of course, we are not be able to answer right away. Number one, what percent of these scripts will eventually be filled. It is our intent to help every patient to get it filled, for a prescription written. But, of course, there are some hurdles along the way with insurance companies there.
And the second question that it’s going to take a few months to figure out is the refill rate for these new patients coming on HPI. As we have reported before, the refill rates after month five or six on the PDP patients is very high in the very high 90 percentile. We do not know in these new population of patients what these refill rates are. However, given the large volume of prescriptions written, we remain optimistic that HPI can be a significant growth for HETLIOZ in the near future.
Great, thanks. And just one follow-up on tradipitant. So it seems like you have a pretty clear vision for the Phase III design that you’re going to bring to the FDA. Could you just give us some color on if you requested that end-of-Phase II meeting? When the Street might see an update? And then what are the key points of debate you think will be in that meeting?
Yes. First of all, I think we all know that this is a competitive space now. There are wonderful companies like Memo Therapeutics developing their own NK1 antagonist. And, of course, we will tell the world only when it is necessary. It is our intent to reach a common understanding at the end of Phase II meeting. But I think the signal that our investors should monitor is the initiation of our Phase III study. And I’m certain, as always, there will be plenty of points of healthy debate with the FDA. But at the end, they are scientific facts. And we’re going to make sure that both sides have a common understanding to move forward.
The debate of the circumstances have to do what kind of endpoints do you need to win to make certain claims, which makes a lot of sense. But of course, here it is very reasonable to assume that Worst Itch NRS, an endpoint of FDA has definitively taken a position that will suffice for a claim of an antipruritic effect of a drug, it’s been safe to assume that this will be a point of agreement. I think the point of debate is what endpoint results shall we have to claim and describe the effect of the drug on disease severity. And there are plenty of choices there. And there are some recent drugs approved, EUCRISA and DUPIXENT.
Of course, different approaches in the disease modification that may have elected certain endpoints that may not be applicable for compounds like ours. So in summary, while we are meeting with the FDA, we don’t consider the FDA end-of-Phase II meeting as a gatekeeper of initiation of the clinical study. And of course, we intend to complete – initiate and complete the Phase III program as soon as possible and in a competitive manner.
Great. Thanks and congratulations on the quarter.
We have a question from Matthew Andrews from Jefferies.
Good afternoon. Thanks for the chance of asking questions. Mihael, can you tell us where you are in the CMC preparation for the Phase III program for CP and AD?
Absolutely. We are actually ready to go. Our CMC is at the commercial scale level. And we are continuously making products and preparing for the clinical studies. So that is not a gatekeeping event.
Okay. And then as it relates to the gastroparesis study, you had indicated last fall that there were some challenges in patient recruitment and that you had taken some steps to ameliorate those issues. Can you tell us how that’s going? Remind us what the issues were? And have these changes translate into improvement and patient recruitment?
Absolutely. And just to recap, we started the study in January of 2017. And for the first six months, recruitment was exceptionally slow. We made significant investments on the protocol, the training of the sites that resulted in speeding up of equipment in the second half of the year. But nevertheless, monthly you do remember correctly that I have highlighted the recruitment in the study has been problematic. And we believe that it is not just the protocol, but a nature of the recruitment process for such a disease. I’m happy to actually report that we are making significant progress, but it’s too early to quantify and adjust any of the timelines. Some of you listening to radio, they have noticed, about two weeks ago, we undertook a national radio campaign, advertising for recruitment in gastroparesis.
And we had a very significant response across the country with about a couple of thousands patients calling in to learn more. And many of them, at least in phone screen, potentially qualified for the study. Of course, it takes more than that to end up to the study site, screen and randomize. And as I said, it’s only a couple of weeks ago. Very exciting, but we cannot declare win yet. But the underlying signal from this really large response by patients underscores the significance of the unmet medical need. And actually has reenergized the entire clinical team here at Vanda of the efforts we have to make to fees recruitment complete the study and hopefully develop a useful treatment for these patients.
Okay. Great. And then last one for me, can you just explain the rationale as to why you’re pursuing an oncology assay, the 297, for blood cancers? It doesn’t seem to fit from a strategic point of view. So if you could just walk us through the thought process there. It’s a bit different than your portfolio of established products. Thanks.
Definitely. Maybe I’ll address the strategy fit question. As many know, Vanda has taken a position of using innovation and in the pursuit of therapeutics in a indication agnostic manner. It is because that we believe that technological advances, improvement in access of patients, doctors and efficient marketing does allow companies know to have an agnostic approach. In past times, companies thought a lot about synergies in the development portfolio. But we consider those to be mechanistic in execution and not at the core of the innovative thinking. And if, in fact, Vanda has a portfolio of compounds, including sleep-wake disorders, psychiatric conditions, dermatology, gastroenterology, eye disorders and, of course, oncology.
Now specifically for VTR-297 or known as Trichostatin A, Trichostatin A is a prototypical naturally-occurring HDAC inhibitor that has been studied now over 40 years in – with thousands of publications, understanding quite well it is effect in oncology. However, HDAC inhibitors that have been chemically synthesized and developed act as a prototypical Trichostatin A have targeted oncology indications for the purpose of killing cancer cells.
Our interest in developing Trichostatin A in oncology is actually to pursue the mechanism of inducing terminal differentiation and by that, eventually killing cancer cells by apoptosis. And at the same time, we plan to utilize our pharmacogenomic strategy to identify gene and genetic factors that will predict response in these patients. So in summary, it is a novel examination of a mechanism of action for the HDAC inhibitor Trichostatin A in including terminal differentiation in tumors. By the way, there is a vast literature that suggest that Trichostatin A can have this effect of induction of terminal differentiation at noncytotoxic doses.
Okay. Thank you.
The next question comes from Derek Archila from Oppenheimer.
This is Chris for Derek. Do you have any update on the Smith-Magenis program and on the recruitment for that program? In addition, how confident are you that you can meet the time lines?
Thank you very much, Chris. As we said our goal is the results by year end. And this study is attempting to recruit 40 patients and the study design is a double crossover design. The recruitment is actually reenergized now. We are in the process of contacting a few hundred patients that have already expressed interest through their families in learning more and participating. And hopefully, that will result in us identifying the remaining patients for the study. We do remain confident we’ll have results by end of year. And we are certainly hopeful that we could recruit these patients earlier.
Thank you very much.
We have no further questions at this time. I would like to turn the call over to Dr. Polymeropoulos for final remarks.
Thank you very much for joining this quarter call. We’ll talk to you soon, hopefully, with the results of the jet lag study and in the next quarter. I wish you all a happy Valentine’s Day Eve. Thank you.
Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.