Vanda Pharmaceuticals (Nasdaq: VNDA) May 07, 2009 Fanapt FDA marketing approval conference call transcript with analyst question and answer session:

Mihael Polymeropoulos (Vanda CEO and founder) Prepared Remarks

MP: We are excited to discuss with you the approval of Fanapt for treatment of schizophrenia. Vanda announced yesterday that the U.S. FDA had granted marketing approval to Fanapt/iloperidone for the acute treatment of adult patients with schizophrenia.

The approval of Fanapt by the FDA represents many years of tireless efforts by countless former colleagues, many investigators, and thousands of patients that participated in the development of this new treatment for schizophrenia.

I would like first to extend my gratitude to all those who contributed and reaffirmed the commitment of Vanda Pharmaceuticals to the discovery and development of medicines for those in need.

The approval was supported by two placebo-controlled phase 3 clinical studies comparing Fanapt to placebo and active control in patients with schizophrenia as well as safety data for more than 3,000 patients. Fanapt is a mixed dopamine D2 / serotonin 5HT2A receptor antagonist and belongs to the class of atypical antipsychotics.

The efficacy of Fanapt for the treatment of schizophrenia was supported by two placebo-controlled short term four and six week trials. Both trials enrolled patients who met the DSM-III/IV criteria schizophrenia and Fanapt was shown to be superior to placebo in controlling symptoms of schizophrenia across doses of 12-24 mgs per day.

The recommended target dose range for Fanapt is 12 mg to 24 mg per day. Titration to a target dose of 12 mg per day can be achieved in as little as four days.

In a little more detail; In the four week placebo-controlled study involving one fixed dose of Fanapt 24 mg per day compared to placebo and an active control (Geodon), the 24 mg per day of Fanapt was superior to placebo in the Positive and Negative Symptom Scale (PANSS) total score.

Similarly, in the six week placebo controlled trial, enrolled in two dose ranges of Fanapt, 12-16 (mg) and 20-24 mgs per day, compared to placebo and an active control (Risperdal), both doses of Fanapt were superior to placebo on the Brief Psychiatric Rating Scale (BPRS) total score.

While it is not known for how long patients treated with Fanapt should be maintained on treatment, it is generally recommended that responding patients be continued beyond the acute response. Patients should be periodically reassessed to determine the need for maintenance treatment.

Fanapt was generally well tolerated and the most commonly observed adverse reactions (incidence >=5% and two-fold greater than placebo) were dizziness, dry mouth, fatigue, nasal congestion, orthostatic hypotension, somnolence, tachycardia, and weight increase.

Weight gain was mild and the overall mean weight increase in short and long term 52 week studies was 2.1 kg. Fanapt was not associated with any medically important elevations in glucose, triglycerides, or cholesterol.

Fanapt was also associated with only modest elevations of prolactin as compared to larger elevations seen with some other drugs in this class.

Fanapt has a low incidence of extrapyramidal symptoms (these are movement disorders and tremors) and a placebo-like rate of akathisia. This is restlessness and an ability to sit still, which are adverse events that are often associated with some other drugs in the class of atypical antipsychotics leading to discontinuation of treatment.

Similarly to some other drugs in this class, Fanapt may affect heart rhythm parameters and specifically the QTc interval, which may lead physicians to consider prescribing Fanapt after other antipsychotics have been tried first.

Vanda plans to make Fanapt available in pharmacies later this year. Again, we’re very excited and we’re very appreciative that the FDA reviewed all the information in the data and found Fanapt to be a compelling treatment for schizophrenia with efficacy equal to other atypical antipsychotics and a compelling safety profile with significant advantages, especially in (inaudible) patients and physicians.

(Q&A instructions…)

Questions from COREY DAVIS of Natexis Bleichroeder (7:48 mark)

DAVIS: What was it, if there was one thing that really changed the FDA’s mind in what you had submitted for your response?

MP: Let me first suggest something that usually gets unrecognized, which is the quality of the team that we have at Vanda. That was a critical factor. The second is the way that Vanda has operated, and Corey you know that very well, is to be very true to the science and the facts.

The third aspect is that the FDA decides (inaudible) so that they are open-minded to good scientific arguments so all along there was one lingering detail that goes into approval; Is this drug inferior to other antipsychotics and we have answered the FDA that this is not the case and they approved the drug.

DAVIS: I think a lot of people out there that are thinking whether or not to buy your stock right now are asking probably the biggest question which is, are you going to sell it yourself or are you going to try and partner this thing. How do you balance thinking about those two things?

MP: First of all lets talk about what is the value proposition to patients and physicians and then lets (discuss) what is the value to physicians for the products. The profile of the product and the label is up for inspection at www.fanapt.com (and) is actually pretty convincing that this is probably one of the most compelling labels of all the atypical antipsychotics. This is not just (because) of the similar efficacy (to) other antipsychotics but actually the compelling safety profile, as I said before, on extrapyramidal symptoms, akathisia, weight gain, and metabolic which is all of them relatively mild and very competitive to other drugs in the class.

Now lets talk a little bit about what happens to patients with schizophrenia. First of all, this is a debilitating disease affecting 1% of the world’s population and these are patients very dear to me since as a psychiatrist I have treated them for many years.

Despite the availability of several treatments for patients with schizophrenia, still there remains a tremendous medical need. 50% of the patients with schizophrenia switch drugs in any given year. They do that because of dissatisfaction with current treatments. Most of the dropouts in treatment happen because of lack of tolerability from side effects. The two key categories of side effects are movement disorders and metabolic (disorders); both areas that Fanapt offers to be a very good alternative. We feel that there is a significant place for Fanapt to be used for patients with schizophrenia.

If you are trying to think what’s the value position, all I can tell you is that the class of atypical antipsychotics is one of the largest classes of therapeutics today in the U.S. and the world; commanding about $15 billion in the U.S., $20 billion worldwide. The lowest selling product today is Pfizer’s Geodon and that is $1 billion (in 2008 worldwide sales).

The second proposal (the next step) with Fanapt, (even though) we just got approval for the oral formulation, is actually the commitment of Vanda to continue to develop the once-a-month injectable formulation, which will offer a unique placement of the drug to address compliance issues.

Unlike the oral formulations where there are a few drugs available, the only atypical antipsychotic today available in the market for patients is Risperdal Consta, which has been, as you may know, immensely successful, commanding $1.3 billion in revenues last year. Of course there is a lot of development work (with the iloperidone depot formulation) to do. So that’s how we think about the (iloperidone) value proposition.

DAVIS: There are so many different things that I can think of that you can do to bolster the clinical trial…Basically you have a limited amount of cash to do so. You already mentioned the injectable form but how would you prioritize new studies or new spending? I’m thinking of things like the dossier for Europe, the (subcutaneous) form, maybe some bipolar studies. Is that all still going to be on hold until you set up more of a commercial infrastructure or can you start thinking about those types of things right now?

MP: Corey, it is too early to (start thinking) about any specific direction of your suggestions. All I can say is that it is clear, not only because of the size of the market but (because of) the profile of the product that this is a competitive position and Vanda will have a number of options but you spoke to commercialization (so) let me give you a number of thoughts: So what makes Fanapt competitive? We fit the (efficacy or safety?) profile, we said the market size, there are a couple of very specific things that make it even more competitive.

One is the concentrated prescribing base of physicians. There are 5,000 out of the 25,000 psychiatrists, 20% of them, that prescribe 60% of the atypical antipsychotics in the U.S. and you can see that this is addressable with a targeted sales effort.

The other piece of the puzzle is reimbursement. Again, there is some great news here. There are no formulated restrictions for patients with schizophrenia. 90% of them belong to either the Medicaid or Medicare Part D class. All antipsychotics are (part of) this protected class and they cannot be excluded from the formularies.

These are the characteristics: the large market, the competitive profile of Fanapt, the small prescribing base, and the access to the formularies that make Fanapt a very attractive asset to a number of potential (Fanapt marketing) candidates: big pharma, mid pharma, and even Vanda.

DAVIS: So not to put words in your mouth but you’re open to all options right now?

MP: Absolutely and I think there are many (options).

DAVIS: Last question, the second drug in your pipeline, the forgotten one, VEC-162, did this (Fanapt’s approval) in any way change your plans for the development of that one and what can you start now that you got (Fanapt approval) under your belt?

MP: So let me tell you what the ongoing plan is and we can update you. Tasimelteon or VEC-162 is a novel melatonin agonist that we have shown now in two phase 3 and one phase 2 studies compelling results in improving sleep onset and sleep maintenance, especially under conditions of a circadian dysregulation.

Circadian rhythm (disruption) shows up in a number of conditions that we all understand very well (like) jet lag, delayed sleep phase disorder, and shift work sleep disorder.

We are in the process now of finding a meeting which will happen with the FDA (an end of phase 2 meeting) late in Q2 which will clarify the entire path to a NDA (New Drug Application) filing.

As preliminary work on the market analysis (of) the jet lag application suggests, this is a large untapped market where tasimelteon would be extremely differentiated. We are also evaluating another very large potential market, which is the delayed sleep phase disorder area, where again tasimelteon could also potentially be a very differentiated and unique proposition.

DAVIS: You pay at a 25% royalty stacked to Novartis but is there a milestone payment due to Novartis based on this approval.

MP: Yes, $12 million.

Questions from ELEMER PIROS of Rodman and Renshaw (18:45 mark)

PIROS: Do you or is it Novartis who actually owes some royalties to Titan Pharmaceuticals?

MP: We only pay royalties to Novartis and Novartis distributes to Titan after that.

PIROS: So the mid-20% range royalties, that’s your only obligation?

MP: That is our only obligation, yes.

PIROS: If you could please help us understand the intellectual property. I understand that the patents on the oral formulation would expire in 2011 and then you would get an additional five years if I’m not mistaken. What is the situation with the injectable please?

MP: On the oral formulation the (new chemical entity) patent expires end of 2011 but of course we would be getting the five year Hatch-Waxman Extension making (marketing exclusivity) to late 2016. We are already in the process of applying for that extension and Vanda would qualify for an even larger number than five but unfortunately it is capped at five.

Now on the depot formulation the patent expires in early 2020.

PIROS: 2020. What do you think of the regulatory path for developing the injectable formulation would be? I understand that Novartis had some early phase 1/2 trials conducted.

MP: Correct. Back in history a little bit: Yes, Novartis has taken the depot formulation into patients in a phase 2 study and shown it to be very well tolerated. The path that we suspect we will have to take but we have not yet confirmed with the FDA is manufacturing our clinical supplies of the depot formulation, performing short pharmacokinetic studies to understand the profile and to choose the final formulation, and then conduct a phase 3 study, usually it is a 12 week study, which would be the pivotal and only study necessary for filing (for marketing approval). So we will have to try and file this with the FDA but it is possible that this program could be completed in the next three or four years.

PIROS: Excellent. Thank you very much.

(Conference call concluding remarks)