Vanda Pharmaceuticals (VNDA): Forget Its Schizophrenia Drug For Its Other Star? JNJ & BMY

Small cap biopharmaceutical stock Vanda Pharmaceuticals Inc (NASDAQ: VNDA) surged 14.02% after announcing a settlement agreement with Novartis AG (NYSE: NVS) related to ongoing license arbitration proceedings for Fanapt, a schizophrenia treatment drug – meaning its worth taking a closer look at the stock along with large caps Johnson & Johnson (NYSE: JNJ) and Bristol-Myers Squibb Co (NYSE: BMY) which also have important schizophrenia drugs in their portfolios.

What is Vanda Pharmaceuticals Inc?

Small cap Vanda Pharmaceuticals is a biopharmaceutical company focused on the development and commercialization of products for the treatment of central nervous system disorders to address unmet needs. The company has a portfolio of clinical and commercial stage programs with the goal of bringing important new treatment options to patients.

In addition, the company's HETLIOZ™ became the first approved treatment for Non-24-Hour Sleep-Wake Disorder by the FDA on January 31, 2014.

As for potential peers or benchmarks, large cap Johnson & Johnson offers Risperdal Consta as an established schizophrenia and bipolar disorder treatment which recorded sales of $896 million for the nine months ending September 2014 while Bristol-Myers Squibb Co's Abilify had sales of $1.5 billion for the first nine months of the year.

What You Need to Know or Be Warned About Vanda Pharmaceuticals Inc

After the market closed on Monday, Vanda Pharmaceuticals announced a settlement agreement with Novartis AG related to its ongoing Fanapt license arbitration proceedings where the parties have agreed to dismiss the arbitration and to release each other from any related claims. As a part of the settlement agreement, Novartis will:

Transfer all US and Canadian rights in the Fanapt franchise to Vanda Pharmaceuticals. Make a $25 million equity investment in Vanda Pharmaceuticals at a price per share equal to $13.82. Grant to Vanda Pharmaceuticals an exclusive worldwide license to AQW051, a phase II alpha-7 nicotinic acetylcholine receptor partial agonist.

Note: More details can be found in the filing about the settlement here.

Launched in January 2010, Vanda Pharmaceuticals had been drawing just a 10% royalty on the drug which only has $70 million in annual sales – a far cry from the sales Johnson & Johnson and Bristol-Myers Squibb Co derive from their schizophrenia. Fanapt was launched in 2010 and is currently approved in the US (along with Israel and Mexico) for the treatment of schizophrenia in adults. It also has patent coverage through two key patents, a new chemical entity (NCE) patent set to expire in November of 2016 and a method of treatment patent set to expire in 2027. 

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However, Vanda Pharmaceuticals' HETLIOZ is potentially more exciting as it treats non-24-hour disorder which is estimated to affect up to 100,000 Americans - most of whom are totally blind. Analysts estimate that HETLIOZ could bring in sales of more than $350 million annually with Fanapt helping to generate revenue or cash flow to help market the drug. In addition, the National Federation of the Blind is helping to get word out about the drug which should lower the company's marketing costs.

In late October, Vanda Pharmaceuticals reported $14.8 million in revenues compared to $10.9 million for the second quarter of 2014 and $8.7 million for the third quarter of 2013 and there was a net loss of $1.4 million compared to a net loss of $21.6 million for the second quarter of 2014 and $5.4 million for the third quarter of 2013. The CEO said:

"Our innovative approach to the commercialization of HETLIOZ® for Non-24 has yielded impressive third quarter revenue.  We are developing a robust commercial engine that has just begun to access the Non-24 market in the U.S. by creating awareness leading to diagnosis and treatment. The Named Patient Program launch in the EU and Canada under the HETLIOZAccess™ initiative furthers our commitment to patients with Non-24 worldwide. Our commercial and clinical pipeline is also advancing with the recent launch of Fanapt® in Israel, the planned launch of Fanapt® in Mexico, the HETLIOZ® European Marketing Authorization Application, and development activities in pediatric Non-24, Smith-Magenis Syndrome, and chronic pruritus."

In addition, Vanda Pharmaceuticals did a 5,000,000 share offering at $11.60 per share to net approximately $54.0 million for sales and marketing expenditures in connection with the commercialization of HETLIOZ.   

Share Performance: Vanda Pharmaceuticals Inc vs. JNJ & BMY

On Tuesday, small cap Vanda Pharmaceuticals rose 14.02% to $13.58 (VNDA has a 52 week trading range of $8.34 to $19.25 a share) for a market cap of $460.38 million plus the stock is up 9.4% since the start of the year and up 29.5% over the past five years. Here is a look at the more volatile performance of Vanda Pharmaceuticals compared with the more steady performance of diverse large caps Johnson & Johnson and Bristol-Myers Squibb Co:

Finally, here are the latest technical charts for all three stocks:

The Bottom Line. At the very least, small cap Vanda Pharmaceuticals is worth watching and not for its schizophrenia drug as success with HETLIOZ could put the company on a solid long term footing.