Executives at Vanda Pharmaceuticals aren't saying when the once-teetering biotech will be sold or will partner with a big pharma company. But that's what analysts expect after federal regulators had a change of heart last month and approved its promising antipsychotic drug Fanapt.

Inside the small Rockville company, there are no emotions left except relief, said CEO Mihael H. Polymeropolous.

Much to his surprise, the Food and Drug Administration rejected approval of the drug last July with a chilly "not-approvable letter." That prompted Vanda to shut down operations and slash its work force from 53 to 23 employees. It also sparked a palace coup attempt by dissident stockholders, before the FDA reversed itself and approved the schizophrenia treatment May 6.

"Yes, now, even with approval, there is no room left even for joy and happiness. After all these months, there is just relief," Polymeropolous said.

When it applied for FDA approval in October 2007, Vanda was widely recognized as one of Maryland's rising biotech stars. Elaine Amir, executive director of Johns Hopkins University's Montgomery County campus, where Vanda relocated in 2006, wrote, "Now, Vanda's stock is rising, and many are wondering what's next for this up-and-coming bioscience company. …"

‘Our nuclear winter'

Again biotech experts are wondering about Vanda. This time they're wondering why the FDA reversed course on Fanapt so quickly, in effect bringing Vanda back from the brink of likely extinction or, as Polymeropolous called it, "our nuclear winter."

Karl Theil, a biotech analyst with The Motley Fool financial services company, said, "It is not, at all, usual for this [not-approvable letter] to happen. But, it is more common for companies to get an approvable letter with a laundry list of things that needed to be done before approval."

Vanda's FDA application for approval had been backed by data from 35 clinical trials involving more than 3,000 patients.

But after receiving the FDA's bad news in July, Polymeropolous told shareholders that he all along felt that it was a misunderstanding.

"They misinterpreted that, as it compares to one of the other [similar] drugs, Fanapt may appear inferior," he said. "We wanted to convince them that the two drugs had entirely different treatment pathways in the body."

Vanda met with FDA officials on Sept. 10. "We also said that the drug may have some safety advantages over other treatments, including less side effects like movement disorders and weight gain," Polymeropolous said

Edward M. Rudnic, chairman of the Tech Council of Maryland, said, "For the FDA to backtrack on the non-approvable letter goes to the fact that the CEO was able to redirect toward the positive. Most people on Wall Street discount that because that's what all CEOs say."

Peter J. Weiden, professor of psychiatry at the University of Illinois at Chicago, who helped Vanda design its clinical trials, said, "Fanapt is not fundamentally new. I think FDA may have reasoned that it was a me-too drug. My sense of it is that this was not a formal requirement [by FDA] though." However, "as a clinician we have a desperate need for new drugs."

Weiden said Fanapt will be effective for some patients who don't respond to other antipsychotic medications.

"I was disappointed [with the FDA's initial rejection] because it was also chilling for any future medicine because it may discourage other companies from bringing in new treatment agents here to be considered," he said.

In November, the FDA said it would consider Vanda's counter-arguments during a standard six-month review period.

But the damage had already been done for tiny Vanda, which was trying to compete in an estimated $16 billion market worldwide with giant pharmas with similar products. Its competitors are the industry Goliaths: Eli Lilly with 40,000 employees and sales of $20 billion annually; Johnson & Johnson with 120,000 employees and sales of $154 billion; and Pfizer with 82,000 employees and sales of $48 billion.

Vanda's stock tumbled 73 percent with the not-approvable letter.

"This came as a shock to us, since we had actually expected a relatively clean approvable letter, and it further indicates the continuing hurdle-raising at the FDA," wrote Corey Davis, an analyst at Natixis Bleichroeder, last year.

The company's stock had fallen from a high of about $30 a share when it applied for Fanapt approval to gradually stabilize at about $5. It then dipped under $1 after the FDA's not-approvable letter.

Liquidate and cease

In its darkest days, Vanda averted a stockholder revolt organized by shareholder Kevin C. Tang. From September to December, Tang Capital Management LLC purchased more than 2.5 million shares of Vanda at $1 or less per share, according to Securities and Exchange Commission records.

In February, with shares at 91 cents on the Nasdaq, Tang Capital, then owning a 14.9 percent stake in the company, issued a proxy statement demanding that Vanda save its remaining value for stockholders by liquidating its remaining assets and ceasing operations. Tang recommended himself and a colleague to replace Polymeropolous and Vanda‘s chairman on its board. The company publicly rejected Tang's play.

This week, Polymeropolous recalled that Tang "did not feel that the plan of the company was the correct one. We expressed disappointment back then for the distraction that created for us. We said we are facing approval of our drug and it was not the time for management to be distracted."

Tang did not return several calls and e-mails seeking comment for this report.

The company's operations continued to shrink. "I visited there and the huge office space was like a ghost town. It was kinda weird," Weiden said.

By March 31, the company had spent a total of about $152 million in research and development expenses, including about $76 million on Fanapt.

Vanda's acting CFO, Stephanie Irish, said that when the FDA letter of approval for Fanapt finally arrived late on May 6, management was delighted but didn't immediately celebrate, even though the Johns Hopkins staff hung a large banner to congratulate Vanda and hosted a reception.

"That day I was working on getting the press release out, working with the public relations firm and our attorneys. Then we heard of the Tang withdrawal [of the proxy] the same day," Irish said. "Kevin Tang called with congratulations and wanted to know what we plan to do."

Davis wrote in a May 19 statement, "So it truly was a shocker that Vanda was able to convince the FDA and gain final approval." He said that despite lacking other indications for use by the FDA "on a schizophrenia basis alone, we truly feel that it is best in class, especially with [fewer] side effects."

Vanda's stock jumped 1,000 percent. On May 19, Natixis Bleichroeder raised its target price for Vanda shares from $12 to $22 because, whether it builds a sales force of 65, finds a partner, or sells outright, shareholder value would increase. Davis wrote that his group expects Vanda to partner.

Earlier, on May 8, Davis wrote, "We have no specific knowledge, but we have to believe that numerous larger companies are now flooding Vanda with requests."

Irish said even a small piece of the 20 million-patient market will be good news to Vanda, but "we have no sales projections yet. We are reviewing all the opportunities in an evaluation stage."

Theil, at The Motley Fool, is not so sanguine.

"These kind of companies like Vanda are formed for the intention to bring drugs to market that had some data behind them and finish develop them," he said of Fanapt, which Swiss pharma Novartis licensed to Vanda. "I am very dubious of that model. Vanda will have to prove that it can be done."

Rudnic added: "It was a dramatic turnaround and a vindication for the CEO. Mihael said all along that it would be approved. I think it was a fairly strong reversal given how negative FDA's not-approvable letter was."

Said Amir of Johns Hopkins: "These days at Vanda, it looks very positive. We are seeing a lot of smiles."