Vanda Pharmaceuticals - Q2 2023

Transcript

Operator (participant)

Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2023 Vanda Pharmaceuticals Inc. earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Kevin Moran, Vanda's Chief Financial Officer. Please go ahead.

Kevin Moran (CFO)

Thanks, Audra. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals' second quarter 2023 performance. Our second quarter 2023 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 H. Polymeropoulos, our President, Chief Executive Officer, and Chairman of the Board, and Tim Williams, our General Counsel. 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 and assumptions that involve risks, changes in circumstances, 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 most recent annual report on Form 10-K, 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 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, CEO, and Chairman of the Board)

Thank you very much, Kevin, and good afternoon, everyone. Thank you for joining us to discuss Vanda's second quarter 2023 results. I will first discuss key highlights from our commercial products and clinical pipeline, and then I will ask our General Counsel, Tim Williams, to provide a brief update on litigation matters before turning the call over to Kevin Moran to discuss our commercial products and financial results. Taking into account the challenging environment due to the at-risk launch of generic tasimelteon, we have had a strong first half of the year. Over the last several months, we have taken a number of steps to position the business for continued success, including the reorganization of our sales force, better support our current commercial products, as well as the potential near-term expansion of the Fanapt franchise if we receive FDA approval for bipolar I disorder.

Let's begin with our results for HETLIOZ. Despite the at-risk launch of generic tasimelteon, our team delivered solid performance and continues to work tirelessly to support patients on therapy and prescribers. During the second quarter, we recorded a greater number of HETLIOZ dispenses than in the first quarter. Turning to Fanapt, we are focused on driving growth in the currently approved indication of schizophrenia and ensuring Fanapt is well positioned to capitalize on the bipolar market, which is significantly larger than the schizophrenia market, if approved. This quarter, we recognized slight year-over-year growth for Fanapt in schizophrenia that we will look to build upon as we put into place initiatives intended to drive brand recognition among providers and patients. Building on the previous strong clinical trial results for bipolar disorder, we continue to pursue FDA approval for Fanapt in this indication.

For HETLIOZ, we also continue to pursue FDA approval for insomnia. We believe that HETLIOZ for insomnia could present a meaningful commercial opportunity and provide an exciting therapeutic option for patients. We're also pursuing FDA approval for tradipitant in patients with gastroparesis. In support of our new drug application for tradipitant, we will be submitting to the FDA results of three clinical studies that we believe demonstrate substantial evidence of efficacy of tradipitant in this indication, as well as the safety database to support the tolerability of the drug. The expanded access program is ongoing, with multiple patients have been treated for at least six months, and the longest treated patient for more than two years. In May, we announced positive results from the phase three study of tradipitant in the treatment of motion sickness.

We're currently conducting additional studies and plan to apply for marketing approval after the completion of the clinical program. In addition to these late-stage programs, we also announced that the FDA granted Orphan Drug Designation for VCA-894A, our antisense oligonucleotide therapeutic for the treatment of Charcot-Marie-Tooth, axonal, type 2S caused by cryptic splice variants with the IGHMBP2 gene. CMT2S is a rare subtype of Charcot-Marie-Tooth and inherited peripheral neuropathy for which there is no available treatment. At this point, I will ask Tim Williams, our General Counsel, to provide a brief update on litigation matters. Tim?

Tim Williams (SVP, General Counsel, and Secretary)

Thank you, Mihael. I'll start with our intellectual property and related litigation. As previously disclosed, we appealed the negative decision in our HETLIOZ and litigation to the U.S. Court of Appeals for the Federal Circuit. Back in May, the Federal Circuit panel affirmed the lower court ruling. We then petitioned the full Federal Circuit to rehear the case. Earlier this month, the Federal Circuit requested that Teva and Apotex respond to our petition for rehearing by this Tuesday, August 1st. Separately, we have an additional patent infringement lawsuit pending in Delaware against Teva and Apotex regarding a method of treatment patent for HETLIOZ that was not litigated in the prior case. Finally, we have a pending lawsuit against Teva in New Jersey for violations of the Lanham Act related to Teva's at-risk launch of its generic version of HETLIOZ.

We intend to vigorously pursue our interests in each of these matters. I'll turn now to some of our recent regulatory challenges related to generic product approvals. We continue to challenge the FDA for its approval of generic tasimelteon without braille labeling. We filed suit in federal court challenging FDA's approval of Teva's generic tasimelteon, and we filed Citizen Petitions challenging FDA's approval of both Teva and Apotex's generic tasimelteon, both of which were approved by the FDA without braille labeling. The FDA responded to these Citizen Petitions earlier this week, rejecting our arguments. We continue to believe that FDA's approvals are improper under law, and we intend to continue vigorously pursuing these matters, including our pending litigation. Separately, we continue to challenge other FDA actions undertaken during review of generic applications.

We filed two Citizen Petitions challenging FDA's approval of Teva and MSN's generic tasimelteon, with what we believe to be inadequate bioequivalence testing. We have not yet received a response from the FDA on these petitions. Last, we filed a lawsuit in the Court of Federal Claims, seeking economic damages based on what we believe was FDA's unlawful disclosure of our confidential information and trade secrets to generic and filers during the FDA's review of applications for the generic versions of both HETLIOZ and Fanapt. More detail on this and our other pending litigation matters can be found in our periodic filings and on public docketing systems. With that, Mihael, I'll turn it back to you.

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Thank you very much, Tim. I will now turn the call to Kevin Moran to discuss our commercial progress and financial results. Kevin?

Kevin Moran (CFO)

Thank you, Mihael. I'll begin by summarizing our financial results for the first six months of 2023, before turning to discuss the second quarter of 2023. Total revenues for the first six months of 2023 were $108.6 million, a 13% decrease compared to $124.6 million for the same period in 2022. HETLIOZ net product sales were $61.6 million for the first six months of 2023 and saw a 21% decrease compared to $78.2 million for the same period in 2022. The at-risk launch of a generic version of HETLIOZ had a significant impact on HETLIOZ performance during the first 6 months of 2023. The decrease to net product sales was attributable to a decrease in price net of deductions, partially offset by an increase in volume.

Our HETLIOZ net product sales for the first quarter of 2023 reflected higher unit sales as compared to recent prior periods and resulted in a significant increase of inventory stocking at specialty pharmacy customers at the end of both the first quarter of 2023 and the second quarter of 2023. Turning now to Fanapt. Fanapt net product sales of $47 million for the first six months of 2023 reflect a 1% increase compared to $46.4 million for the same period in 2022. For the first six months of 2023, Vanda reported net income of $4.8 million, compared to a net loss of $3.9 million for the same period in 2022.

Net income for the first six months of 2023 included an income tax provision of $3.3 million, as compared to an income tax provision of $0.1 million for the same period in 2022. Operating expenses for the first six months of 2023 were $109.4 million, compared to $128.8 million for the first six months of 2022. The $19.4 million decrease was primarily driven by lower R&D expenses, lower SG&A expenses, and lower cost of goods sold. The decrease in R&D expenses was primarily driven by decreases related to our late-stage clinical program for Fanapt and our VQW-765 development program, partially offset by increases related to our tradipitant activities and our early-stage ASO program.

The decrease in SG&A expenses was primarily driven by lower expenses associated with marketing, sales, and commercial support activities for our commercial products. The lower cost of goods sold is due to lower HETLIOZ net product sales and the decrease in the royalty rate owed to BMS on HETLIOZ net product sales from 10% to 5%, effective in December 2022. Vanda's cash, cash equivalents, and marketable securities, referred to as cash, as of June 30th, 2023, was $489.4 million, representing an increase of $48.5 million to cash compared to June 30, 2022, and an increase of $22.5 million compared to December 31st, 2022. Turning now to our quarterly results.

Total revenues for the second quarter of 2023 were $46.1 million, a 28% decrease compared to $64.4 million for the second quarter of 2022. HETLIOZ net product sales were $22 million for the second quarter of 2023, a 47% decrease compared to $41.2 million in the second quarter of 2022. The at-risk launch of a generic version of HETLIOZ continued to have a significant impact on HETLIOZ performance during the second quarter of 2023. The decrease to net product sales was attributable to a decrease in volume and a decrease in price, net of deductions, partially offset by the recognition of $4.8 million of net product sales related to a change in estimate on revenue constrained during the first quarter of 2023.

Our HETLIOZ net product sales, as reported for the first quarter of 2023, reflected higher unit sales as compared to recent prior periods. The higher unit sales during the first quarter of 2023 resulted in a significant increase in inventory stocking at specialty pharmacy customers at the end of both the first quarter of 2023 and the second quarter of 2023. HETLIOZ net product sales during the second quarter of 2023 reflect lower unit sales as a result of the reduction of the elevated inventory levels at specialty pharmacy customers at the end of the first quarter of 2023. Turning to Fanapt. Fanapt net product sales were $24.1 million for the second quarter of 2023, a 4% increase compared to $23.2 million in the second quarter of 2022.

Fanapt net product sales in the second quarter of 2023 increased by 5% as compared to $22.9 million for the first quarter of 2023. Fanapt prescriptions in the second quarter of 2023, as reported by IQVIA Xponent, increased by less than 1% compared to the first quarter of 2023. For the second quarter of 2023, Vanda recorded net income of $1.5 million, compared to net income of $2.6 million for the second quarter of 2022. Net income for the second quarter of 2023 included an income tax provision of $1.1 million, as compared to an income tax provision of $1.2 million for the same period in 2022.

Operating expenses in the second quarter of 2023 were $48.9 million, compared to $60.9 million in the second quarter of 2022. The $12 million decrease was primarily driven by lower SG&A expenses related to spending on marketing and sales activities for our commercial products. Lower R&D expenses related to our late stage Fanapt development program and our VQW-765 development program, partially offset by expenses related to our early-stage ASO program and lower cost of goods sold due to lower HETLIOZ net product sales and the decrease in the royalty rate owed to BMS on HETLIOZ net product sales from 10% to 5%, effective in December 2022. Operating expenses in the second quarter of 2023 decreased by $11.6 million, as compared to $60.5 million in the first quarter of 2023.

The decrease was primarily driven by lower SG&A expenses related to ongoing litigation and other corporate expenses, and lower R&D expenses related to our tradipitant development program. Given uncertainties surrounding the U.S. market for HETLIOZ for the treatment of Non-24, as a result of the ongoing HETLIOZ patent litigation and the at-risk launch of a generic version of HETLIOZ, Vanda is unable to provide 2023 financial guidance at this time. Vanda will continue to evaluate its ability to provide financial guidance as the year progresses. HETLIOZ net product sales will likely decline in future periods, potentially significantly, related to the at-risk launch of a generic version of HETLIOZ in the U.S. Additionally, the company constrained HETLIOZ net product sales for the first 6 months of 2023 to an amount not probable of significant revenue reversal.

As a result, HETLIOZ net product sales could experience variability in future periods as the remaining uncertainties associated with variable consideration are resolved. With that, I'll now turn the call back to Mihael.

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Thank you very much, Kevin. At this point, we would be happy to open the line to any questions you may have.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We'll take our question from Andrew Tsai at Jefferies.

Andrew Tsai (Managing Director)

Hi, everyone. Thanks so much. Appreciate all the updates. The first question for us is on HETLIOZ existing sales. Just curious, what were the organic sales in Q2 in terms of price and volume outside of inventory fluctuations? Just trying to gauge how much inventory drawdown there was in Q2, or if there was a buildup. We're also trying to see whether, you know, Q2 Q3 sales could potentially increase quarter-over-quarter, assuming this quarter did see some type of inventory drawdown. Thanks.

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Yeah, thank you very much, Andrew. I will let Kevin answer this question.

Kevin Moran (CFO)

Yep, thanks for the question, Andrew. A couple different pieces there. I'll, I'll provide the detail where we've, we've provided it, in the, in the, in the release. What we saw in the second quarter was a drawdown of the inventory stocking or a portion of the inventory stocking that we saw in the first quarter. Inventory levels at the end of the second quarter were still elevated, relative to recent prior periods. Not as high as the first quarter, but still higher than we've seen in recent prior periods. There's, there's still, you know, some inventory to work through, before they would return to historic levels.

Andrew Tsai (Managing Director)

Very clear. Speaking of the ongoing, I guess, litigation versus the generics, I think it sounded like you've petitioned to rehear the case, court case. I think you mentioned Teva and the other party has until next Tuesday to respond. What would be the next steps after that, and how quickly could we get a potential resolution?

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Yeah. I would let Tim Williams handle this. Maybe Tim, you can discuss a little bit about the procedure with the Federal Circuit.

Tim Williams (SVP, General Counsel, and Secretary)

Yeah, happy to do that, Mihael. These petitions for rehearing can be decided by the Federal Circuit without any response from the other parties. In certain instances, the Federal Circuit may request a response because one or more of the judges sitting on the Federal Circuit are interested to learn a little bit more information about the case to hear from the other party. That's what occurred in this case. There, there's really not a set procedure from here in terms of required next steps. If the request from the court holds in terms of timing, Teva and Apotex would need to file this response with the court, like I mentioned, on Tuesday of next week.

After that, you know, we may have an opportunity to provide additional reply, but there's not a definite procedure around that. The timing is, is likewise, there's no prescribed timing in either the Federal Circuit's court rules or the rules of appellate procedure. It's a little bit unclear what the timing would look like and what the resolution would be.

Andrew Tsai (Managing Director)

Got it. Very clear, though, nonetheless. Speaking about the pipeline, you know, as we think about the next 6 to 12 months, there does seem to be, you know, potentially, a good set of catalysts. The question would be, you know, have you filed the NDA or sNDAs for HETLIOZ in insomnia, tradipitant for gastroparesis, Fanapt for bipolar? If not, what are the gating steps to those filings? You know, feel free to talk about your confidence on all three potential approvals later in 2024.

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Yeah. The we do not give specific details and interim updates, such as when we submit, when the FDA files, and what the PDUFA date is. What we can tell you it is that all three applications are progressing, without, you know, necessarily telling you which ones have been submitted, filed, or to be submitted. Given where we are, we expect that a regulatory decision should be able to be rendered in each one and all of them within the next 12 months.

Andrew Tsai (Managing Director)

Got it. You know, maybe one more question. Last one is just, you know, as we think about your existing cash, the almost $500 million, you know, how do you foresee to spend that cash? Specifically, I ask in the context of business development. You know, are you open to that? Secondly, if you are, what kind of deal structure, what indication areas are you looking for? Are you looking, you know, to buy immediate revenues, or are you thinking about, more about building out the earlier stage pipeline? Thank you.

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Yeah. Certainly, the cash we have, the marginal profitability, allows us to have a lot of flexibility to look at potential business development opportunities from the outside. We have a number of them ongoing. In terms of types, we're very focused to first diversify our revenue and support our commercial presence, as our own organic pipeline, as we discussed just a minute ago, is actually exceptional, with three new filings ongoing. We believe that we can be generally agnostic in the types of indications where a compound with maybe already commercial presence exists. We think we are keen to understand opportunities that can be synergistic with our already existing commercial infrastructure.

Again, we're more agnostic on indications and more focused on, late stage, and, potential diversification of revenue sources.

Andrew Tsai (Managing Director)

Got it. Thank you very much.

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Sure, Andrew. Thank you for your questions.

Operator (participant)

That does conclude the Q&A session. I'd like to turn the conference back to Vanda management for closing remarks.

Mihael Polymeropoulos (President, CEO, and Chairman of the Board)

Yes, thank you very much, and, thank you all for joining this quarterly call. Looking forward to talk to you in future periods. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.