Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Vanda Pharmaceuticals (VNDA) has a very promising pipeline, which will help long-term oriented investors. Vanda has a pipeline that will set it up for success, as well as some very promising drugs. There are a mix of medium and long-term catalysts that will help Vanda to create long-term share price growth for its shareholders. Below is a graphic of Vanda's Pipeline:
(click to enlarge)
Fanapt
Fanapt is a drug that is already approved in the United States. It is partnered with both Titan Pharmaceuticals (TTNP.OB) and Novartis (NVS) in the United States. Currently, Vanda receives a 10% royalty on Novartis net sales of the drug. While this revenue has not been very substantial over the last few quarters, it nonetheless helps to offset part of the costs at Vanda. For the first quarter, revenues that Vanda received as a result of Novartis's net sales was $1.5 million, while its amortization of the upfront payment received from Novartis was $6.6 million. While this drug is not selling very well in the United States, as the sales base continues to expand, so too should the amount of royalties that Vanda receives from its various marketing partners.
Unfortunately, Vanda recently withdrew its marketing application for the European Union. This was simply due to the fact that the EU requested data from the relapse prevention study REPRIEVE which is currently not available. Fortunately, this study is funded by Novartis, so Vanda will only have to wait for the results of the study, without having to pay for the actual study. Vanda also says that it will reassess its strategy in Europe, while waiting for the results to become available.
Fanapt will also become available in Israel in the mid-summer, and will be marketed in Israel by megapharm. While there was not in the original press release any mention of receiving a royalty from Megapharm, Vanda will at least receive revenue from Megapharm in Israel due to the fact that it is in charge of producing the supply of Fanapt, saying in the press release that:
Under the terms of the agreement, Megapharm will seek regulatory approval for Fanapt™ in Israel. Vanda will supply Megapharm with Fanapt™ drug product for packaging and sale and Megapharm's CNS specialty sales force will promote Fanapt™ to psychiatrists in Israel. The application for regulatory approval of Fanapt™ in Israel was filed in May 2011.
Any revenue that Vanda receives from Megapharm should help to offset the operating costs of Vanda, and should help to lower its net loss.
Vanda also announced in 2012 that Fanapt was approved for marketing in Argentina, this could provide some more revenue to Vanda through its marketing agreement with Biotoscana Farma. The agreement is very similar in its provisions with the Megapharm agreement in the fact that Vanda will supply the drug saying that:
Under the terms of the agreement, Biotoscana will seek regulatory approval for Fanapt ™ in Argentina. Vanda will supply Biotoscana with Fanapt ™ drug product for packaging and sale and Biotoscana's CNS specialty sales force will promote Fanapt ™ to psychiatrists in Argentina.
Vanda also has a marketing partner lined up in Mexico, Probiomed S.A. de C.V. for Fanapt. The agreement is similar to the ones signed in both Israel and Argentina. If and when Vanda receives approval in Mexico, this should help to provide revenue to offset Vanda's net loss. The launching of the drug in other countries presents medium and long term catalysts for shareholders, which should help to drive a part of the increase in stock price over the next few years.
Tasimelteon
This is Vanda's make or break drug so to speak. This drug has the potential to provide substantial revenue for Vanda, who will be so far self-commercializing the drug. According to the most recent conference call, Vanda would owe Bristol Meyers Squibb (BMY) a royalty on Vanda's sales of the drug. However, Vanda is still looking for a marketing partner for the drug. The drug treats non-24 hour disorder in the totally blind, and there is currently no other approved drug on the market to treat this debilitating condition in both the US or in the European Union. Vanda recently submitted its New Drug application for Tasimelteon.
Vanda has taken substantial steps towards building awareness around what non-24 hour disorder is, which will likely be one of the most challenging parts of marketing the drug. However, Vanda's steps are encouraging, and it should be able to roll out an effective marketing strategy for the drug.
In its recent conference call, Vanda mentions that it has filed for priority review. This review, if granted, should help to lower the timeline for a PDUFA decision down to eight months instead of the typical twelve months if Vanda needs to undergo a regular review cycle. Also, encouragingly Vanda reported a positive pre-NDA meeting with the FDA. This should help to remove some investor concerns regarding the NDA, however, the ultimate question is whether or not the drug will ultimately be approved by the FDA in this review cycle.
The results from one of the Phase III clinical trials helps to point out why Tasimelteon could be a drug with such a large potential. The drug met its primary endpoint of entrainment of the Melatonin rhythm as compared to placebo. Essentially, the drug has the ability to reset the body's clock and help to treat this condition. Patients showed an improvement across a variety of scales, but I believe that the most important scale for the purposes of marketing Tasimelteon will be the fact that patients showed an improvement in the Global Impression of Change scale. The impressive results and safety profile of Tasimelteon helps for me to be assured that the drug will ultimately be approved by the FDA for the treatment of Non-24 hour disorder in individuals who are totally blind and lack the light sensitivity to reset the body's clock.
Tasimelteon represents a variety of catalysts for investors in Vanda. One catalyst would be if Vanda is granted priority review, this would help to lower the amount of time needed for the FDA review of the drug. Another significant catalyst will be if the FDA decides to initiate an advisory committee on Tasimelteon. This would be a catalyst as the FDA usually, but not always, follows the advice of the committees. Tasimelteon's PDUFA date is the most important catalyst for Vanda investors right now, and then for the long term after Tasimelteon gets approved, the catalysts would switch to much more market oriented catalysts. The following table helps to summarize the catalysts for Tasimelteon:
Catalyst Events for Tasimelteon| Priority review | Vanda should receive more information about the review cycle at the 60 day mark (around late July to early August we should know more). |
| Advisory Committee | If an advisory committee is needed in the opinion of the FDA, it will represent a significant catalyst for Vanda investors. |
| PDUFA | The conservative timeline would be 12 months from the date of filing, which would put the PDUFA date at approximately May 31st, 2014 (assuming that the press release was on the same day the NDA was filed). |
| Marketing | After receiving FDA approval, the investing community will be much more concerned with Vanda hitting its marketing projections for the drug. |
The market potential for Tasimelteon should be rather substantial for the indication. Vanda estimates the market potential to be $500 million worldwide. Clearly, if successfully marketed the revenue could be substantial for Vanda, and therefore create substantial long term growth for shareholders.
VLY-686
The final drug in Vanda's pipeline is VLY-686, which it acquired from Eli Lilly (LLY). This drug is described by Vanda as being a phase II ready program. It is not yet clear what this drug would be used to treat, however, there is potential for an NK-1R antagonist in the following fields, according to the article cited above:
"Merck's Emend is currently the only NK-1R antagonist approved in the United States for the treatment of nausea caused by chemotherapy or surgery. A recent study also showed it reduced alcohol cravings and drinking among patients with alcohol dependency.It may also have indications for anxiety and depression."
Any of these indications could be rather large indications for the drug. These indications could draw substantial attention from the investment community, as well as potentially provide substantial revenue for Vanda if the drug is ultimately approved in any of the above indications. Although investors are not clear on the exact development timeline for VLY-686, due to the fact that it has essentially been on the back burner until the approval of Tasimelteon. The drug does have some rather large potential, and should help to increase shareholder value. In my opinion, this is the part of Vanda's pipeline that is often overlooked by the investment community. The drug has the potential to drive long-term revenue growth for the shareholders, and should not be overlooked.
Financial Position
One thing that is very important when looking at any company as a long term investment is the financial position of the company. An investor does not want to put their money into a company that they are not sure will survive long-term. With that in mind, let's dive into the financials at Vanda.
For the first quarter of 2013, Vanda recorded a net loss of $4.2 million. This was with revenue of $8.1 million from the Fanapt licensing agreement amortization, as well as the royalties that Vanda received on Fanapt. At the end of the first quarter Vanda had $110.9 million in cash and cash equivalents. The projections for the year is that Vanda will go through $45 million to $50 million in cash. This is rather consistent with its cash burn last year of $47.5 million. While this seems to be a rather large number keep in mind that Vanda has to build up a sales team, as well as conduct many activities to be ready to effectively market Tasimelteon. The real question is whether or not Vanda is going to have to dilute to pay the bills next year, and that is where the projections begin to get harder to make. Adding in the increased costs of building a sales force, that is a possibility. Note, that the increased costs would not happen if Vanda chose to partner the drug out to a large pharmaceutical partner. However, this would lose much of the upside for the drug, it would likely be better in the long run for Vanda to be able to simply dilute and build a sales force, this way it can keep the sales that it makes (after paying royalties to Bristol).
Most significantly, on Vanda's balance sheet it lists no long term debt. This would suggest that instead of dilution, Vanda may be able to get a line of credit to help finance its commercialization costs. Only time will tell for investors what Vanda chooses to do in regards to commercialization. The net loss at Vanda is not very concerning at this point in time, as Vanda is trying to get its drug through the FDA review process. Vanda appears to be on solid financial footing to merit a long term investment in the company.
Conclusion
Vanda has a bright future ahead, if it can successfully market Tasimelteon. Vanda's choice to either market the drug on its own or with a partner will provide substantial value for long-term shareholders. At this point it appears as though royalties for Fanapt are more or less icing on the cake, and just help to limit some of the immediate downside potential at Vanda. Vanda with marketing Tasimelteon and having the potential for VLY-686 in the wings, will provide asymmetric upside opportunity for long-term oriented investors.
By Alexander Maxwell
Source: www.seekingalpha.com
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