Greenbackd

Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) is trading below its net cash value and an investor, Tang Capital Partners (TCP), has called for the company to “cease operations immediately, liquidate [VNDA]’s assets and distribute all remaining capital to the Stockholders.” At the company’s $0.78 closing price yesterday, VNDA has a market capitalization of $20.8M. We estimate the net cash value to be more than 100% higher at $42.6M or $1.60 per share. The company is hemorrhaging cash, so the investment turns on TCP’s ability to get control and staunch the bleeding. We think they’re a fair bet, so we’ve added VNDA to the Greenbackd Portfolio.

About VNDA

VNDA is “is a biopharmaceutical company focused on the development and commercialization of small molecule therapeutics, with exclusive worldwide commercial rights to two product candidates in clinical development for various central nervous system disorders.” The company’s investor relations website is here.

The value proposition

VNDA is rapidly burning through its cash. It consumed $7.5M in the December quarter, which brings its cash burn for the twelve months to December 31, 2008 to $46M (that’s right, forty-six million dollars). Its cash burn predominantly consists of salaries and related costs for R&D personnel of $3.8M and $4.8M in G&A expenses. The company has a substantial holding of cash and equivalents (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

We estimate the net cash value to be $42.6M or $1.60 per share. If VNDA burns through the same amount of cash in this quarter as the last quarter, this number will be reduced by $7.5M to $35.4M or $1.33 per share.

Off-balance sheet arrangements and contractual obligations

According to the company’s most recent 10Q (for the September quarter), it has no off-balance sheet arrangements. The contractual obligations as at December 31, 2008 totaled $5.8M and represents operating lease payments for the company’s headquarters through to 2016.

The company also has the following amounts due:

Consulting fees

We have engaged a regulatory consultant to assist us in our efforts to obtain FDA approval of the iloperidone NDA. We have committed to initial consulting expenses in the aggregate amount of $2.0 million pursuant to this engagement, $122,000 of which was expensed in the third quarter of 2008, and the remainder of which will be expensed in the fourth quarter of 2008. In addition, we may retain the services of the consultant on a monthly basis from and after January 1, 2009 through December 31, 2010. In the event that the iloperidone NDA is approved by the FDA, we will be obligated to pay the consultant a success fee of $6.0 million, which amount will be offset by the aggregate amount of all monthly retainer fees previously paid to the consultant (Success Fee). In addition to these fees, we are obligated to reimburse the consultant for its ordinary and necessary business expenses incurred in connection with its engagement. We may terminate the engagement at any time; however, we will remain obligated to pay any remaining Success Fee if the iloperidone NDA is approved by the FDA following such termination.

Clinical research organization contracts and other contracts

We have entered into agreements with clinical research organizations responsible for conducting and monitoring our clinical trials for iloperidone and tasimelteon, and have also entered into agreements with clinical supply manufacturing organizations and other outside contractors who will be responsible for additional services supporting our commercial activities and our ongoing clinical development processes. These contractual obligations are not reflected in the table above because we may terminate them on no more than 60 days notice without incurring additional charges (other than charges for work completed but not paid for through the effective date of termination and other costs incurred by our contractors in closing out work in progress as of the effective date of termination).

License agreements

In February 2004 and June 2004, we entered into separate licensing agreements with Bristol-Myers Squibb and Novartis, respectively, for the exclusive rights to develop and commercialize our two compounds in clinical development. We are obligated to make payments under the conditions in the agreements upon the achievement of specified clinical, regulatory and commercial milestones. If the products are successfully commercialized we will be required to pay certain royalties based on net sales for each of the licensed products. Please see the notes to the condensed consolidated financial statements included with this report for a more detailed description of these license agreements.

As a result of the successful commencement of the Phase III clinical study of tasimelteon in March 2006, we met the first milestone specified in our licensing agreement with Bristol-Myers Squibb and made an associated milestone payment of $1.0 million. During March 2007, we met our first milestone under the license agreement with Novartis for VSF-173 relating to the initiation of the Phase II clinical trial and made an associated milestone payment of $1.0 million. On November 3, 2008, we received written notice from Novartis that this license agreement had terminated in accordance with its terms as a result of our failure to satisfy a specific development milestone within the time period specified in the license agreement. Please see Item 5 “Other Information” of Part II of this quarterly report on Form 10-Q for a more detailed description of the termination of this license agreement. In November 2007, the Company met a milestone under the license agreement with Novartis for iloperidone relating to the acceptance of the NDA for iloperidone in schizophrenia and made a license payment of $5.0 million to Novartis. No other amounts were recorded as liabilities nor were any other contractual obligations relating to the license agreements included in the condensed consolidated financial statements as of September 30, 2008, since the amounts, timing and likelihood of these payments are unknown and will depend on the successful outcome of future clinical trials, regulatory filings, favorable FDA regulatory approvals, growth in product sales and other factors. For a more detailed description of the risks associated with the outcome of such clinical trials, regulatory filings, FDA approvals and product sales, please see the section “Risk Factors” of this quarterly report on Form 10-Q.

The catalyst

TCP disclosed its intial 21.1% holding in VNDA in a 13D notice dated October 6, 2008. The amended 13D notice dated November 17, 2008 disclosed a smaller 14.3% holding, which might suggest that TCP had reduced its holding. This was not the case. In fact, TCP was a purchaser throughout the relevant period. Unfortunately for TCP, some of its VNDA holdings were held in an account at Lehman Brothers International (Europe) (from the amended 13D notice):

On September 15, 2008 LBIE [Lehman Brothers International (Europe)] was placed into administration under United Kingdom law and four partners of PriceWaterhouseCoopers LLP were appointed as joint administrators (the “Joint Administrators”). The Joint Administrators have advised us that most of TCP’s shares were rehypothecated. The Joint Administrators and UK counsel have further advised that LBIE’s customers will not be able to recover rehypothecated shares, but instead will be entitled to a general unsecured claim with respect to such shares. Accordingly, TCP in this filing has reduced the number of shares of [VNDA] held by TCP to the extent such shares were held at LBIE. By making this filing, TCP does not waive any argument that it is entitled to recover such shares and expressly reserves such arguments.

Since the date of the last filing on Schedule 13D, on November 7, 2008, Tang Capital Partners, LP purchased 560,000 shares of Vanda Pharmaceuticals, Inc.’s common stock through the open market for $0.8291 per share.

(If you’re interested, you can read more about “rehypothecation” here.) In a further amended 13D notice dated February 18, 2009, TCP disclosed an increased 14.9% holding and discussed its nomination of two candidates to the board VNDA:

Since the date of the last filing on Schedule 13D, Kevin C. Tang has continued to have discussions with [VNDA] and its Board of Directors in regards to the strategic direction of [VNDA]. Mr. Tang has expressed his opinion and proposed to [VNDA] and its Board of Directors that in order to maximize value for all Stockholders, [VNDA] must cease operations immediately, liquidate [VNDA]’s assets and distribute all remaining capital to the Stockholders.

Since [VNDA] continues to operate as of the date of this filing and has not publicly announced any plan of liquidation and dissolution, the Reporting Persons believe [VNDA]’s Board of Directors has rejected their proposal to immediately cease all operations, liquidate [VNDA]’s assets and distribute all remaining capital to the stockholders. In light of the foregoing, and in order to preserve and maximize the diminishing value of [VNDA]’s assets for the benefit of all Stockholders, the Reporting Persons determined to nominate certain individuals to be elected to [VNDA]’s Board of Directors at the 2009 Annual Meeting of Stockholders, and propose certain resolutions to [VNDA]’s Stockholders, as discussed in more detail below.

On February 13, 2009, Tang Capital Partners, LP delivered a letter (the “Letter”) to the Nominating and Governance Committee of [VNDA] recommending the following individuals (the “Nominees”) as nominees for election to [VNDA]’s Board of Directors at the 2009 Annual Meeting of Stockholders:

Kevin C. Tang
Andrew D. Levin, M.D., Ph.D.

On the same date, Tang Capital Partners, LP also delivered a notice (the “Notice”) to [VNDA] of its intention to take the following actions at the 2009 Annual Meeting of Stockholders, or any other meetings of stockholders held in lieu thereof, and any adjournments, postponements, reschedulings or continuations thereof:

(1) nominate the Nominees as candidates for election to [VNDA]’s Board of Directors;

(2) propose resolutions of the stockholders of [VNDA] to amend the Bylaws to (i) provide that [VNDA]’s Annual Meetings of Stockholders for each year commencing in 2010 be held on April 30th or, if April 30th is not a business day, on the first business day following April 30th and (ii) provide that certain matters requiring the approval of [VNDA]’s Board of Directors require a unanimous vote for such approval; and

(3) propose resolutions of the stockholders of [VNDA] to request that the Board of Directors promptly take all necessary action to swiftly and orderly liquidate [VNDA]’s remaining assets and return all remaining capital to [VNDA]’s stockholders.

A copy of TCP’s letter nominating Messrs Tang and Levin to the board is set out below:

February 13, 2009

VIA HAND DELIVERY AND ELECTRONIC MAIL (ir@vandapharma.com, chip.clark@vandapharma.com)

William D. Clark
Corporate Secretary
Vanda Pharmaceuticals Inc.
9605 Medical Center Drive, Suite 300
Rockville, MD 20850

Re: Recommendations for Candidates for Election as Directors at the 2009 Annual Meeting of Stockholders of Vanda Pharmaceuticals Inc. (the “Company”)

Ladies and Gentlemen:

Tang Capital Partners, LP, a Delaware limited partnership (“TCP” or the “Investor”), and its affiliates collectively control 3,965,852 shares of Common Stock and have beneficially owned 5% or more of the Common Stock, based on the number of shares reported outstanding by the Company in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, for at least four months. Please refer to Exhibit A, attached hereto, for information regarding the Investor’s holdings.

The Investor believes that it would serve the best interests of the Company and its stockholders for the Nominating/Corporate Governance Committee of the Company (the “Committee”) to nominate the following two candidates (each a “Candidate” and together the “Candidates”) to the Board of Directors of the Company (the “Board”) at the 2009 Annual Meeting of Stockholders of the Company (the “2009 Annual Meeting”):

1. Kevin C. Tang
2. Andrew D. Levin, M.D., Ph.D.

Biographical and background materials relating to each Candidate are set forth in Exhibits B and C attached hereto. In addition, the Candidates are prepared to complete any D&O questionnaire reasonably requested by the Company in connection with their nomination as directors.

Pursuant to the guidelines outlined in the Company’s public filings with the Securities and Exchange Commission, the Investors are hereby submitting these two candidates to the Committee for review and consideration. Both Candidates meet the criteria and attributes said to be considerations of the Company’s Nominating/Corporate Governance Committee as described in the Company’s proxy statement for its 2008 Annual Meeting of Stockholders, including:

· ability to read and understand basic financial statements;
· general understanding of the Company’s industry;
· relevant expertise upon which to be able to offer advice and guidance to management;
· ability and sufficient time to devote to the affairs of the Company;
· excellence in his field;
· ability to exercise sound business judgment;
· commitment to vigorously represent the long-term interests of the Company’s stockholders; and
· an absence of factors that would preclude the Board from making a determination that the candidates are independent directors as defined in Rule 4200(a)(15) of the rules of the NASDAQ Stock Market.

In addition, we believe that the backgrounds and qualifications of these Candidates, when considered as a group with the other directors of the Company, will provide a balance of knowledge, experience and capabilities that will allow the Board to fulfill its responsibilities. Moreover, the affiliation of each of the Candidates with a holder of significant shares of the Company will align their interests with those of stockholders generally.

…

In a separate letter to the Corporate Secretary of the Company, the Investor is simultaneously submitting a Stockholder’s Notice of Nomination of Persons for Election as Directors and Other Proposed Business at the 2009 Annual Meeting of Stockholders of Vanda Pharmaceuticals Inc., dated February 13, 2009 (the “Notice”). If the Board determines to nominate either of the proposed Candidates, recommends his election and includes his name in the proxy card for the 2009 Annual Meeting, the Investor will not directly nominate such Candidate at the 2009 Annual Meeting. If we do not hear from you by the close of business on February 28, 2009, we will pursue any and all courses of action that we determine to be appropriate for the election of our Nominees at the 2009 Annual Meeting.

Please address any correspondence or questions to Tang Capital Management, LLC, Attention: Kevin C. Tang, telephone (858) 200-3830, facsimile (858) 200-3837 (with a copy to Cooley Godward Kronish LLP, 4401 Eastgate Mall, San Diego, CA 92121, Attention: Ethan E. Christensen, Esq., telephone (858) 550-6076, facsimile (858) 550-6420).

Very truly yours,

Tang Capital Partners, LP
By: Tang Capital Management, LLC, its general partner
By: /s/ Kevin C. Tang
Kevin C. Tang
Managing Director

VNDA responded by issuing the following press release:

VANDA PHARMACEUTICALS RESPONDS TO ANNOUNCEMENT AND FILING BY A GROUP LED BY TANG CAPITAL PARTNERS, LP

ROCKVILLE, MD. – February 23, 2009 – Vanda Pharmaceuticals Inc. (NASDAQ: VNDA) (“Vanda” or the “Company”) today issued the following statement regarding two letters sent to Vanda by Tang Capital Partners, LP (“TCP”) and a SEC filing by TCP stating its intent to, among other things, nominate two directors to stand for election at Vanda’s 2009 Annual Meeting of Stockholders and submit proposals at the 2009 Annual Meeting to amend Vanda’s bylaws and request that the Board of Directors of Vanda take action to liquidate the Company.

In accordance with Delaware law and the Company’s bylaws, the Company’s Board of Directors is divided into three classes of approximately equal sizes. The members of each class are elected to serve a 3-year term with the term of office of each class ending in successive years. The two current directors of the Company whose terms expire at the 2009 Annual Meeting of Stockholders are its current Chief Executive Officer, Mihael H. Polymeropoulos, M.D. and its current Chairman of the Board, Argeris N. Karabelas, Ph.D. Dr. Polymeropoulos is a founder of Vanda and has served as President and Chief Executive Officer and a Director of Vanda since May of 2003. Dr. Karabelas has served as a Director and Chairman of the Board since 2003, when he co-founded Vanda with Dr. Polymeropoulos. The Company intends to nominate both of these individuals for reelection at the 2009 Annual Meeting of Stockholders. Vanda believes that its current Board of Directors has the independence, the knowledge and the commitment to successfully implement the Company’s business plan and to deliver value for the Company and its stockholders.

“The Board is disappointed that Tang Capital has opted to conduct an election contest, particularly when the Company is so close to receiving a response from the FDA regarding its lead compound, iloperidone. Instead of working with us to maximize stockholder value, Tang Capital has chosen to create unnecessary costs and distractions for the Company at this important time,” said Brian K. Halak, Ph.D., a member of the Company’s Board of Directors and Chairman of its Nominating/Corporate Governance Committee. Vanda believes the best interests of its stockholders will be better served by re-electing Drs. Polymeropoulos and Karabelas, and by continuing to move forward with its current business plan. Vanda therefore intends to oppose TCP’s nominees and to work actively to re-elect Drs. Polymeropoulos and Karabelas.

Vanda carefully reviewed TCP’s proposals to amend its bylaws and determined that such amendments would not be beneficial to the Company and its stockholders. Vanda believes that the proposed amendments requiring unanimous Board consent to approve certain transactions would, in the Company’s opinion, severely restrict the ability of the Company and its Board of Directors to conduct business. In addition, Vanda believes that the proposed amendment requiring the Company to hold its Annual Meeting on April 30 of each year would create unnecessary timing constraints and would not allow the Company enough time to prepare and file its annual proxy statement in a careful, thoughtful and thorough manner. Consequently, Vanda intends to oppose TCP’s proposal to amend the Company’s bylaws.

In addition, the Company does not believe that it is currently in the best interests of Vanda or its stockholders for the Company to “cease ongoing operations” and liquidate the Company, as has been suggested by TCP. Vanda’s Board of Directors and management regularly review all of the strategic options for managing the company to create the greatest value for its stockholders. Vanda’s Board of Directors and management team have been and remain intensely focused on acting in the best interest of the Company and creating value for all of its stockholders. In connection with this goal, Vanda’s management team has been working diligently over the past several months with the Food & Drug Administration (“FDA”) to reevaluate its response to Vanda’s New Drug Application (“NDA”) for iloperidone for the treatment of schizophrenia. In September of 2008, management met with the FDA to discuss the FDA’s not-approvable letter relating to the NDA and submitted a complete response on November 6, 2008, at the request of the FDA. The FDA accepted the complete response for review and has set a new target action date of May 6, 2009. The Company believes that, even in the absence of an approval by the FDA for iloperidone, there remains significant unrealized value in the Company’s other compounds. Therefore, the Company does not believe that liquidation is currently in the best interests of the Company or its stockholders and intends to oppose TCP’s proposal to liquidate the Company.

TCP has previously criticized Vanda’s spending in general and specifically its spending since the receipt of the not-approvable letter from the FDA. However, Vanda has substantially reduced spending and dramatically reduced its employee headcount in the wake of the FDA letter. The Company has been working on a reduced budget and has curtailed all non-essential expenditures. Vanda believes that this approach will allow it to continue to minimize any reduction in stockholder value based on the Company’s cash assets while it awaits the FDA’s reply to its complete response. Unfortunately, due to the course of action taken by TCP, the Company will now need to expend significant unanticipated amounts in connection with its 2009 Annual Meeting of Stockholders.
Moreover, under Delaware law, the Board of Directors is given the power to determine, in the first instance, whether the Company should be dissolved. The only exception to the clear statutory scheme involves unanimous approval of liquidation by all stockholders, which, given the Board’s perspective, is extremely unlikely. The Company’s Board of Directors has determined that it remains to be in the best interests of the Company to continue its operations.

Vanda has previously met with TCP to discuss its proposals and would be willing to meet with them again in the future.

Conclusion

VNDA is an interesting play. With its stock closing yesterday at $0.78, the company has a market capitalization of $20.8M. We estimate the net cash value to be around 100% higher at $42.6M or $1.60 per share. This value is of course deteriorating rapidly, and the challenge for investors is to determine which of two outcomes is more likely: If TCP can get on the board quickly, stop the cash burn and liquidate the company, we’re likely to see a reasonably good return. If TCP cannot get onto the board quickly or at all, the company will continue to burn cash and the investment will be a dud. VNDA has a staggered board, so this will make TCP’s task difficult. We’re inclined to take a position now and see how this plays out, although we’re going to keep a close eye on the proceedings.

VNDA closed yesterday at $0.78.

The S&P500 Index closed yesterday at 721.36.

Hat tip to manny.

[Full Disclosure:  We do not have a holding in VNDA. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]