Earnings Call Transcript - VNDA Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Vanda Pharmaceuticals Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Vanda's Senior Vice President and Chief Financial Officer, Mr. Kevin Moran. Please go ahead, sir.

Kevin Moran, Senior Vice President & Chief Financial Officer (CFO)

Thank you, Illac. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals' third quarter 2020 performance. Our third quarter 2020 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 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. I will then comment on our financial results 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. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in the cautionary note regarding forward-looking statements, 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, 2019, as updated by our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC, 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.

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

Thank you very much, Kevin. Good afternoon, everyone. The third quarter has been an outstanding quarter, despite the pandemic disruption, which peaked in the late spring. The late spring disruption did affect demand for both HETLIOZ and Fanapt as measured by new scripts for each of the products. Given the several week delay from the time the script is written to time to fill for HETLIOZ, the late spring impact on HETLIOZ demand translated to fewer starts in the third quarter. Despite that, and given the continued strong adherence, HETLIOZ revenue was minimally impacted. Our sales force returned to the field in the summer and has effectively navigated local medical office closures and implemented telemedicine approaches. Since late August, we have seen a significant increase in new HETLIOZ scripts, with total new scripts in September reaching all-time highs. This trend has continued in October, and we estimate, again, another record high for new HETLIOZ script generation in this month. Despite the expected payer hurdles, we remain optimistic that this demand will translate soon to revenue and fuel HETLIOZ growth in the fourth quarter and lead us with a positive momentum in 2021. The HETLIOZ new script volume comes from both blind and sighted Non-24 individuals, with the larger portion of these new prescriptions involving the sighted Non-24 population. On Fanapt, Fanapt's revenue in the third quarter was relatively flat compared to the second quarter. Early in the summer, we launched a direct-to-consumer campaign with national television advertisement. While it is early in the campaign, the lead indicators of website visits and searches saw significant increase as compared to before the initiation of the campaign. Qualitatively, the campaign has initiated a national dialogue on schizophrenia aimed at reducing stigma for this devastating illness. In parallel, awareness for our Fanapt brand is entering the national state and is being inserted into the vocabulary of the U.S. population. We remain optimistic that awareness will lead to new starts that will hopefully translate to an increase in the number of patients on treatment. While we continue the marketing sales efforts aimed at growing our commercial revenue, we're also focused on our research and development pipeline on both the already commercialized as well as our pre-commercial pipeline products. The FDA review of our application in Smith-Magenis Syndrome for tasimelteon is ongoing. The FDA has granted priority review for this orphan indication and has set a PDUFA action date in early December. The FDA is evaluating our applications for two formulations of tasimelteon in SMS, the capsule formulation for adults, and the liquid formulation for children. Smith-Magenis Syndrome is a new developmental disorder caused by a genetic mutation of chromosome 17, which is a microdeletion in 90% of the patients and a point mutation in the RAI gene, which is included in the microdeletion region in the remaining 10% of the patients. The most common and most disruptive clinical expression of the disorder is a sleep disorder that impacts the function of patients and, consequently, their families. There is no approved effective treatment for these patients. Vanda has been working over the years in collaboration with a patient advocacy organization, PRISMS, to develop HETLIOZ for SMS and bring it to patients. We plan to continue our collaboration and expand our efforts to increase awareness of the disorder and, once approved, the product for the broader SMS patient population. SMS patients receive their diagnosis through a small number of specialized genetic labs. Vanda has and will continue to establish relationships with all of this community across the spectrum of the diagnostic and therapeutic patient journey. Vanda is well positioned with the existing know-how and existing sales force personnel to support the marketing and sales of HETLIOZ in SMS. SMS affects 1 in 20,000 births, with an estimated U.S. prevalence of approximately 15,000 patients. Approximately 200 of them have already participated in Vanda's SMS registry, and hundreds are associated with the PRISMS advocacy organization. While thousands of patients are already diagnosed with DNA tests, many more remain undiagnosed. Vanda plans to establish a program and a network that will assist in improving awareness for SMS, while enhancing and accelerating diagnostics. We're eager to receive FDA marketing authorization and bring this important product to patients with SMS and their families as soon as possible. On tradipitant, the pivotal Phase III study in gastroparesis has reached the milestone of more than 50% enrollment for the study. As we have previously communicated, we believe the current Phase III study can be the last efficacy study required for NDA filing. With enrollment estimated to be complete in the first half of 2021, we expect an NDA filing for gastroparesis later in 2021. A partial clinical hold for studies longer than three months prevents us from collecting patient safety data for longer than three months, which may affect the NDA filing. The estimated prevalence of gastroparesis in the U.S. is over 5 million patients, the majority of which remain undiagnosed. The only FDA-approved treatment for gastroparesis is metoclopramide, first approved in 1979, which, due to its potential for severe side effects, carries a black box warning and limitations of use of no more than three months. Based on IQVIA data, there are over 3 million prescriptions of oral metoclopramide annually. Given the highly limited treatment options and the safety and tolerability profile of metoclopramide, we believe that a new therapy could achieve significant market share and can represent a $1 billion peak revenue opportunity for Vanda. Other Phase III/IIb programs in motion sickness and atopic dermatitis have paused new randomizations until deemed safe enough to continue clinical studies given the COVID-19 pandemic. In August, we announced the results of the interim analysis from the ODYSSEY study with tradipitant in patients with COVID-19 pneumonia, which showed tradipitant may accelerate clinical improvement in patients with COVID-19 pneumonia. This early analysis suggests that tradipitant may act by accelerating the time to clinical improvement for patients with severe COVID-19 pneumonia. If confirmed, this effect may be of significant clinical benefit for patients as well as for public health by decreasing the amount of resource employed in the treatment of patients with severe COVID-19 pneumonia. Although preliminary, these interim results are in. A larger sample size will be required to definitively determine whether tradipitant offers therapeutic benefit in hospitalized patients with COVID-19 pneumonia by accelerating time to clinical improvement. The results from this interim analysis will be submitted for publication in a peer-reviewed journal. Additional clinical programs for HETLIOZ in delayed sleep phase disorder and insomnia in autism spectrum disorder are in the final stages of planning before beginning their respective Phase III programs early next year. Clinical development programs for Fanapt, including bipolar disorder, Parkinson's disease psychosis and the long-acting injectable formulation in schizophrenia are also in various stages of preparation. This week, we announced that the FDA has approved the investigational new drug application to evaluate Cystic Fibrosis Transmembrane Conductance Regulator, CFTR, activator, VSJ-110, for the treatment of allergic conjunctivitis. This approval marks the beginning of Vanda's development of therapeutics in ophthalmology by exploring the compound's dual anti-inflammatory and prosecretory mechanism of action. The initial Phase II study will evaluate the acute anti-inflammatory effects of VSJ-110 in an ocular allergic challenge model and will evaluate the prosecretory effects using standard ocular fluid assessments. The results from this Phase II study will help guide further development of VSJ-110 to treat a variety of ocular inflammatory conditions, including dry eye disorder. Dry eye disorders are a major health care burden, with an estimated worldwide prevalence of 5% to 20%. About 60 million are reported to be affected in the United States, and more than 10% of people older than 50 years old are affected. While heterogeneous by etiology, dry eye disease presents with common clinical signs and symptoms, which include corneal epithelial injury, decreased ocular fluid and tear breakup time and patient-reported symptoms of ocular discomfort or functional impairment in a low humidity environment. Treatment options available in the United States at present include artificial tears, punctal plugs and the topical anti-inflammatory drugs, cyclosporine and lifitegrast. Despite available options, and even with the successes of RESTASIS and Xiidra brand names, dry eye disease is increasing in incidence and remains an unmet medical need. Other relevant indications include chronic inflammatory conditions, such as internal conjunctivitis, which remain not fully addressed with current treatment options. To conclude, we're optimistic about the growth prospects of our commercial products, HETLIOZ and Fanapt, as we enter the fourth quarter and look for positive momentum into the next year. We look forward advancing all our pipeline programs, and we're particularly looking forward to the FDA decision on our SMS applications in December. And beyond that, we're excited for the completion of the gastroparesis program and NDA filing in 2021. I will now turn the call back to Kevin to discuss our financial results for the quarter. And after that, I will be happy to address any questions you may have. Kevin?

Kevin Moran, Senior Vice President & Chief Financial Officer (CFO)

Thank you, Mihael. I'll begin by summarizing our financial results for the first nine months of 2020 before turning to discuss the third quarter of 2020. Total revenues for the first nine months of 2020 were $180.5 million, a 9% increase, compared to $166.3 million for the same period in 2019. HETLIOZ net product sales of $116.5 million were the primary contributor and driver of our revenues for the first nine months of 2020 and saw a 12% growth compared to the same period in 2019. Fanapt net product sales of $64 million for the first nine months of 2020 reflects 3% growth compared to the same period in 2019. For the first nine months of 2020, Vanda recorded net income of $15.1 million compared to net income of $111.3 million for the same period in 2019. Net income for the first nine months of 2020 included an income tax provision of $5.6 million as compared to an income tax benefit of $88.1 million in the same period in 2019. As a reminder, the income tax benefit of $88.1 million reflected in the financial results for the first nine months of 2019 includes the favorable impact of the release of Vanda's deferred tax asset valuation allowance, which occurred in the third quarter of 2019. Vanda's cash, cash equivalents and marketable securities, referred to as cash, as of September 30, 2020, were $348.5 million, representing an increase of $48.9 million to cash as compared to September 30, 2019. Turning now to our quarterly results. Total revenues for the third quarter of 2020 were $60.3 million, a 1% increase compared to $59.5 million for the third quarter of 2019. HETLIOZ net product sales were $39.6 million for the third quarter of 2020, a 5% increase compared to $37.6 million in the third quarter of 2019. The year-over-year growth of the HETLIOZ business was driven by a combination of unit demand and net price favorability. As of September 30, 2020, the specialty pharmacy channel held under 2.5 weeks of inventory on hand as calculated based on trailing demand and reflects an increase in value of $1.7 million when compared to June 30, 2020. Fanapt net product sales were $20.7 million for the third quarter of 2020, a 6% decrease compared to $21.9 million in the third quarter of 2019. As of September 30, 2020, wholesalers have higher inventory on hand calculated based on trailing demand when compared to June 30, 2020. The value of this inventory change was less than $300,000. Fanapt prescriptions in the third quarter of 2020, as reported by IQVIA Xponent, increased by less than 1% compared to the second quarter of 2020. The performance of the Fanapt business during the second and third quarters of 2020 was impacted by the pandemic and the related disruption to patient visits with their physicians and restrictions on physical access of our sales force to health care providers. Based on IQVIA reported data for 2020, other branded drugs in the atypical antipsychotic class also appear to have been negatively impacted by the pandemic. For the third quarter of 2020, Vanda recorded net income of $5.9 million compared to net income of $100.4 million for the third quarter of 2019. Net income for the third quarter of 2020 included an income tax provision of $2.5 million as compared to an income tax benefit of $88.1 million in the same period in 2019. Again, the income tax benefit of $88.1 million reflected in the financial results for the third quarter of 2019 includes the favorable impact of the release of Vanda's deferred tax asset valuation allowance, which occurred in the third quarter of 2019. Operating expenses in the third quarter of 2020 were $52.6 million compared to $48.7 million in the third quarter of 2019. The $3.8 million increase was primarily due to a combination of higher R&D expenses related to our late-stage clinical programs and higher commercial expenses related to Non-24 awareness and Fanapt marketing efforts. Operating expenses in the third quarter of 2020 were essentially flat as compared to $53 million in the second quarter of 2020, as new randomizations for several clinical trials remain on hold as a result of the COVID-19 pandemic. We expect the operating expenses in the fourth quarter of 2020 to be highly dependent on developments in the pandemic and the extent to which it continues to impact our R&D and commercial activities. We will continue to assess the impact of the evolving pandemic on our business and operations and will provide future updates to our financial guidance as necessary. The financial guidance we previously communicated included the following financial objectives: net product sales from both HETLIOZ and Fanapt of between $240 million and $260 million; HETLIOZ net product sales of between $155 million and $165 million; Fanapt net product sales of between $85 million and $95 million; year-end 2020 cash of greater than $340 million. I will now turn the call back to Mihael.

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

Thank you very much, Kevin. At this point, we'd be happy to answer any questions you may have.

Operator, Operator

Our first question comes from Jason Butler of JMP Securities.

Jason Butler, Analyst, JMP Securities

Thanks for taking my question. I guess, the first one, do you have any updates on the animal toxicology studies requested for tradipitant by the FDA? Any progress with the agency? And then I guess sticking with the FDA theme, can you give us any details on discussions with the agency around the HETLIOZ sNDA for Smith-Magenis?

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

Of course. So first, the question is for the tradipitant nine-month toxicology dose study, which has been the center of discussion with the FDA in order for the FDA to allow safety studies to proceed beyond three months. Vanda has characterized and explained the necessary nature of this study and is concerned that conducting such a study without scientific justification would needlessly harm animals. This discussion is continuing with the FDA through the formal appeal process with the agency, and it is progressing. But I need to emphasize that, while this is going on, the pivotal gastroparesis study is ongoing, and it is our expectation that if we do have positive results in this study by mid-2021, that will be sufficient to file for the gastroparesis indication, although we can anticipate that there may be restrictions to the length of treatment to three months. Of course, all this is further to be discussed, but we believe that given the metoclopramide label of three months, in the absence of any effective treatment beyond that, the FDA, if results are positive, will view our application favorably. No guarantees, of course, but we'll continue this discussion with the FDA. Your second question had to do with Smith-Magenis Syndrome. The review is progressing, and we believe that the agency will take action by their target PDUFA date of December 1.

Jason Butler, Analyst, JMP Securities

Okay. Great. And then I had a follow-up. So the gastroparesis trial has restarted. Why have some other trials not restarted due to COVID? Is it just local variability in decision-making? Or what's the rationale there?

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

Yes. Of course, the gastroparesis study had really slowed down, not stopped. Most, but not all sites had closed, and a few patients were ongoing, and we managed to get drug to their homes. But of course, it is the nature of the disorder. You understand that this is a serious and, at times, life-threatening disorder. These patients have no options. So there is pressure from patients and recognition by the investigators and sites that this study must continue. Contrary to that, for atopic dermatitis, there are other therapeutic options, although there is still a significant unmet medical need. And you can see why, for that indication, it is a little more difficult to recruit with any efficient speed. On motion sickness, you recall, our positive Phase II study that we announced was conducted on actual boat travel. So given the local restrictions, it will not be possible now to put these patients on boats with the proximity and all the other COVID-19 restrictions. Hopefully, we'll come out the other side and begin these activities. I also want to emphasize that the ODYSSEY study in COVID-19 pneumonia is ongoing. In fact, it started with very significant speed in April of this year at the peak of the epidemic in New York. We recruited very quickly the first 60 patients, the results of which we reported in mid-late August. Since then, recruitment has been very slow, just a few more patients, though in the last few weeks we've seen increased enrollment due to recent peaks of hospitalizations in some areas of the country. This study, as we explained in our press release, is hampered peculiarly by recruitment. While there are many cases and hospitalizations, large studies now are almost exclusively run by the U.S. government, which creates a difficulty in recruiting. So we are approaching the government and discussing the possibility of collaboration. Hopefully, we can report on that.

Operator, Operator

Next, we have Chris Howerton from Jefferies.

Chris Howerton, Analyst, Jefferies

And congratulations on all the pipeline progress and, obviously, persevering in the face of the pandemic. I have a few questions mostly related to financials. First, for HETLIOZ and access, can you remind us what the current market access restrictions are and provide any color on conversion of new prescriptions to filled prescriptions? Second, on Smith-Magenis Syndrome, what is the expectation for the launch trajectory? Do you have patients in expanded access or compassionate use that could convert to paying customers, and what is the expected payer mix for that patient population? Third, on Fanapt, can you help us understand the impact of the DTC campaign and how you are thinking about that incremental spend given delays in potential label-expanding clinical studies for the drug?

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

Thank you, Chris. First, a bit about the payer environment with HETLIOZ in Non-24. Nothing much has changed. As we have discussed before, it is a minority—less than half—of the scripts written that actually get filled, and that is due to significant hurdles of prior authorizations and follow-on appeals. That state of affairs has been pretty constant over the last several years. We do plan to adjust our strategy and make a push for better fill rates, but for now, it remains below 50%. The reason we remain optimistic about growth and momentum next year in Non-24 is the surge of new demand and new scripts that we saw in the last part of August, which continued into September and October, reaching new highs for the entire history since launch of HETLIOZ in Non-24. Regarding the SMS launch and expectations, we do have about 20 to 30 patients who have been on drug for several years now in the open-label portion of the SMS study. These patients will be transitioned to commercial product upon approval. We will focus on our existing registry of approximately 200 families with whom we're reconnecting and letting them know about the progress of the program and, upon approval, to get them to start the discussion with their physicians. Our collaboration with PRISMS, which has several hundred families as members, will be critical in getting the word out. PRISMS has been fantastic for us in helping with recruiting for difficult clinical programs, and they're excited; we're brainstorming ways to make their constituency aware of this solution once approved. Most diagnoses for microdeletion or mutation are done by specialized genetic laboratories; we have significant collaborations with one in particular and relationships with others that can be points of increased awareness. Working together with the advocacy organization and targeted digital advertising, we'll be able to reach the potential thousands of patients who have already been diagnosed and work with advocacy organizations to enhance the rate of diagnosis. Not every patient with SMS is diagnosed today. The payer mix is not yet clear. There are minors and adults; some will be covered under parents' insurance, some commercial, and others government-funded. We're sorting this out with the families registered in our database; that's a project we plan to complete in the next few months.

Chris Howerton, Analyst, Jefferies

Thanks. Just to add a little color, the promotional spend this year was higher in the first quarter, slightly lower in the second quarter and basically flat into the third quarter. What's the trajectory from here? Is the DTC spend for Fanapt meaningful or is it relatively modest?

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

First, our guidance for the year for operating expense and forecast is inclusive of what we're doing with Fanapt. This campaign was planned and included in our projections. If the campaign is successful on a return-on-investment basis, we would finance it further. Antipsychotics are highly promotionally sensitive, and there are thresholds to break through, so we're testing to identify the most effective approach. Vanda has extensive experience with DTC over the last six years. DTC can be incremental, and with good measurement you can see early lead indicators. Before committing significant funds, you start to know how it's working and what your ROI is. In summary, there is no unexpected impact on OpEx for the year; it remains as forecasted. We are doing this to increase revenue and will continue if early indicators are positive. Early lead indicators of interest and awareness look good.

Operator, Operator

Next, we have the line of Joel Beatty from Citi.

Joel Beatty, Analyst, Citi

First, on SMS, could you help characterize your confidence in approval when the FDA makes its decision in December? Based on your history with Non-24 and the recent jet lag decision, where does this fall on the spectrum of how FDA could consider it? Also, regarding use of cash going forward, you have a growing cash balance up roughly $50 million year over year to $348.5 million. Any plans or thoughts on how you might use that cash as it grows?

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

I would say we're quite confident, and our dialogue with the FDA is not new. We filed late last year, and after an initial review the review was halted. We addressed the issues and proceeded. While no one can predict outcomes, the FDA is working hard on this review and is quite familiar with the disorder and our file. Importantly, the FDA held a meeting this summer with patient and patient group representatives for SMS to understand what matters most. From that meeting and the questions posed, it was clear the agency wanted to identify the key issue to be treated, which the patients and families confirmed is the sleep disorder and overall sleep quality as measured by parents, which aligns with our primary endpoint. I would consider the division very engaged and informed on the program, and we are very confident. Regarding our cash balance, it gives us security to execute our programs. While Vanda has been conservative over its 17-year existence, we have made significant investments in strengthening commercial presence and in the pipeline. Our pipeline this year, given the COVID pandemic, has not advanced as quickly, which you may see reflected in operational expenses. But we believe the cash balance provides independence and the resources to invest in both commercial growth and the pipeline. A good example is the early investment in collaboration with UCSF on VSJ-110, a CFTR activator and prosecretory agent moving to the clinic for dry eye, an area with significant unmet need. Having the ability to pursue programs like this is important for returning value to shareholders.

Operator, Operator

And currently, there are no further questions at this time. I would now like to hand the call back to Vanda management for closing remarks.

Mihael Polymeropoulos, President & Chief Executive Officer (CEO)

Yes. Thank you very much all for joining us, and thank you very much for your questions. Hopefully, we'll talk soon. Let's all hope for good news beginning in December with the sNDA on SMS. Thank you very much.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Enjoy the rest of your day. Keep safe, and you may now disconnect.