Jazz Pharmaceuticals plc (JAZZ) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Jazz Pharmaceuticals' Full Year and Fourth Quarter 2011 Financial Results Conference Call. Following introduction from the company, we will open the call to questions. I would now like to turn the call over to Ms. Ami Knoefler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals. Please proceed.

Welcome to the Jazz Pharmaceuticals' 2011 Financial Results Conference Call. We reported detailed financial results for Jazz Pharmaceuticals, Inc. and selected financial results for the historic Azur Pharma business in a press release issued earlier today. The release is available in the News and Events section on our company website. Among other things, the press release includes a reconciliation of GAAP net income to adjusted net income of Jazz Pharmaceuticals for 2011, along with the related per share amounts. With me for today's call are Bruce Cozadd, Chairman and CEO; Kate Falberg, CFO; Russ Cox, Chief Commercial Officer; and Jeff Tobias, Head of R&D and Chief Medical Officer. Following some prepared comments, we'll open the call for your questions. Certain remarks we make on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to future events, future financial performance and position, growth potential, planned product launches, future tax position and guidance. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, including risks detailed from time to time under the caption Risk Factors, and elsewhere in SEC filings and reports, including in Jazz Pharmaceuticals, Inc.'s definitive proxy statement related to its stockholder's meeting held on December 12, 2011, and in Jazz Pharmaceuticals plc's future filings. Jazz Pharmaceuticals undertakes no duty or obligation to update any forward-looking statements stated on this call as a result of new information, future events or changes in its expectations. Please note that we expect to file shortly the Form 10-K for 2011 on behalf of Jazz Pharmaceuticals, Inc., including its stand-alone pre-merger audited financial statements for 2011. In addition, as required by the SEC rules, we will also file a separate Form 10-K on behalf of the former Azur Pharma for 2011, including its stand-alone pre-merger 2011 audited financial statements. Finally, we will file a Form 8-K that includes pro forma financial statements for 2011 for the combined entity. Following some brief introductory remarks, we will open the call to questions. And now, I'll hand the call over to Bruce.

Thanks, Amy, and thanks, everyone, for joining our call today. I'm pleased to report that 2011 was an exceptional year for Jazz Pharmaceuticals, Inc., highlighted by a substantial increase in both sales and earnings. Revenues grew by 57%, while adjusted net income per share grew by 127%. We also established a broader platform for future growth in Jazz Pharmaceuticals plc through the transaction with Azur Pharma that closed last month. Kate will discuss the financial results in a few minutes, but first I'd like to talk about some of our products and how we're positioning the company for future growth. With the merger completed, we now have a portfolio of specialty products and a strengthened commercial organization that includes approximately 200 sales representatives, as well as shared services that provide distribution, reimbursement and patient support. Earlier this month, our combined commercial team gathered for our national sales meeting where we rolled out a new organizational structure and reviewed our sales and marketing plans and growth strategies for the year. Coming out of this meeting, our commercial team is highly energized and now organized around 4 product lines, each with dedicated sales and marketing teams. I'll make a few comments about each of the 4 product lines. Let's begin with Xyrem. We continue to be extremely pleased by Xyrem's strong performance, including impressive 11% volume growth in 2011, reflecting its unique and important role in the treatment of 2 key symptoms of narcolepsy. As mentioned in our January 5 guidance call, our expectation for Xyrem this year is continued growth from both price and volume. We expect high single-digit to low double-digit volume growth, driven primarily by increasing the number of active patients. That number grew to approximately 9,300 in the fourth quarter of 2011 from approximately 8,600 in the fourth quarter of 2010. This increase was the results of a number of initiatives implemented during 2011 under the leadership of Russ Cox, who assumed his responsibilities just over a year ago. Among other initiatives, we increased our call audience by identifying a number of prescribers who were treating narcolepsy patients but were not being called on by our sales team. And we started calling on these new potential customers in 3 waves during the year, most recently in November. And we are seeing results that are exceeding our initial expectations. This includes growing numbers of first-time prescription fills, which we watch as a leading indicator. We are also seeing improvements in persistency, which we attribute to positive results from our efforts to improve expectation setting and patient support services during the critical first few months of therapy. This year, we've decided to further sharpen our focus on Xyrem by dedicating approximately 80 highly skilled specialty sales consultants 100% to this product. In the past, we had approximately 110 representatives detailing both Xyrem and LUVOX CR. We believe that having a completely focused team for Xyrem will tighten the alignment between our marketing and sales leaders. We also believe that this focus will allow us to further increase disease-specific training and education, and it will make it easier to roll out new initiatives in the future aimed at increasing uptake in our labeled indications. In 2012, we will continue our focus on the initiatives that are working well. We also have a couple of new things planned, including additional patient support activities and peer-to-peer training on the best practices for the use of Xyrem. Turning to Prialt. We were pleased to see an uptick in fourth quarter sales. As a reminder, Prialt is the only non-opioid indicated for the management of severe chronic pain in adult patients for whom intrathecal therapy is warranted and who are intolerant or refractory to other treatment such as systemic analgesics, adjunctive therapies or intrathecal morphine. Prialt is currently used in less than 3% of the implanted pain pumps in the U.S., and we think this represents a significant growth opportunity over time. We believe that investments we make behind this product will provide an attractive return in the years to come. Accordingly, we are increasing the dedicated sales force from approximately 20 reps to approximately 30. We also plan to invest further in physician education and to continue to enhance patient and physician support services. Regarding our psychiatry products, the FazaClo franchise and LUVOX CR, we are combining those products under another focus sales and marketing team to take advantage of some overlap in call points and leverage the existing skill sets of this team, including the strong psychiatry background of some. These products will be promoted by approximately 40 sales representatives. Our goal this year for LUVOX CR is to maintain the product through continued targeted promotion to prescribers who treat OCD patients. Regarding FazaClo LD and HD, the focus is to continue educating physicians about the available higher dose offerings, which offer greater patient convenience. At the end of 2011, appropriately 30% of the shift to volume by milligrams was represented by the higher dosage strengths of FazaClo. We also hope to strengthen our offering for FazaClo with a potential new oral solution of clozapine for which an NDA was submitted at the end of 2011. Our fourth sales and marketing team will focus on our women's health and other products, including Elestrin, a topical gel for estrogen replacement therapy, along with our line of prenatal vitamins. In this area, we have a dedicated sales force of about 50 people. Full prescribing information for our products is available on their respective websites. On the R&D front, we've been highly focused on strengthening our drug safety and pharmaco-vigilance capabilities and compliance focus, with 3 executives joining us in the fourth quarter to further these efforts. During 2012, we’ll look forward to beginning our efforts to invest selectively in R&D programs that are a good fit with our commercial strategy, under the leadership of Jeff Tobias and his team. We were very pleased with the results of Jazz Pharmaceuticals, Inc. for 2011, and we believe we've set the stage for a tremendous year ahead for Jazz Pharmaceuticals plc. Our company's commitment to patients is stronger than ever, and we continue to strengthen relationships with the medical community. Our executive team has also been bolstered by recent additions from Azur, with Seamus Mulligan, Fintan Keagan, Eunan Maguire, David Brabazon and Mike Kelly joining us. And we're also pleased to welcome Suzanne Hooper who joins us as General Counsel in 2 weeks. The bottom line is that we believe we're in great position to drive future growth of the company. At this time, I'd like to turn the call over to Kate for more specifics on 2011 financial results.

Thanks, Bruce. For the full year 2011, we reported total revenues of $272 million for Jazz Pharmaceuticals, Inc., reflecting very strong growth of 57%, driven primarily by Xyrem. Total Xyrem net sales were $233 million for 2011, a 64% increase over the prior year, reflecting both price and volume growth. Fourth quarter net sales of Xyrem were $72 million, an increase of 67% over the fourth quarter of 2010.Net sales of LUVOX CR for the full year 2011 were $33 million, a 21% increase over 2010. Note that sales of LUVOX CR in the fourth quarter of 2010 included $2 million due to a change in revenue recognition. Total SG&A and R&D expenses were $123 million compared to $95 million in 2010. 2/3 of the increase was due to non-recurring expenses related to the Azur Pharma transaction, including $11 million of transaction and integration costs and $7 million of stock-based compensation charges resulting from modification of stock options. Excluding these costs, our combined operating expenses increased by $10 million, or 11%, and half of that increase was due to higher stock-based compensation expenses driven primarily by a higher stock price applied to 2011 option grants. Adjusted net income for the year was $165 million, or $3.52 per share, which exceeded our prior guidance and was more than double our 2010 performance, reflecting the significant operating leverage in our business model. Adjusted net income and net income per share exclude intangible amortization, stock-based compensation, transaction and integration costs associated with the Azur Pharma transaction and other adjustments. The press release issued earlier today and posted to our website details the GAAP results and also contains the reconciliation of GAAP and adjusted financial measures. We also ended the year with a very strong balance sheet, including $158 million in cash and no debt. The former Azur Pharma ended the year with $80 million in cash and no debt, so the pro forma combined cash and marketable securities balance was $238 million. Now I'll make a few comments on selected 2011 results for the historic Azur Pharma business. Azur Pharma's 2011 net sales were $94 million, slightly under the range predicted in September due to a difference in the reclassification of certain items from operating expense to gross-to-net. EBITDA, excluding transaction costs related to the merger, was $29 million, within the predicted range. 2011 sales of FazaClo for the high and low doses combined were $39 million compared to $37 million in 2010. As Bruce indicated, Azur Pharma made progress in 2011 at going the higher doses strengths for FazaClo, and we believe that we'll continue to make progress on this front in 2012. Azur Pharma's net sales of Prialt were $21 million for 2011, with fourth quarter net sales of $6 million, up 20% from the year ago fourth quarter. We were pleased to see the increase in fourth quarter sales following Azur's implementation of new promotional materials and reimbursement support services in the third quarter. Azur Pharma's net sales for the women's health and other products were $35 million for the full year, reflecting significant growth of Elestrin. As a final note, our post-merger corporate development team is working well together under the leadership of Eunan Maguire, the former President of Azur Pharma's, who is now our SVP of Strategy and Corporate Development. Our priority continues to be looking to leverage our commercial platform by acquiring products that are on the market or close to market, targeted to specialty physician audiences that address important unmet medical needs and with a number of years of exclusivity. We believe we are well positioned as an acquirer with our demonstrated commercial capabilities, strong financial position and Irish corporate structure. And we will continue to maintain financial discipline as we evaluate potential opportunities and seek to create additional shareholder value. At this time, we'd like to open the call for your questions.

[Operator Instructions] And our first question will be coming from the line of Gene Mack from Mizuho.

Just wondering, Kate, if you can comment a little bit on what we might expect for gross-to-net going into the first quarter, given the fact that you guys have recently taken another price increase? And then, should we expect that there's been any change to the maximum allowable monthly coupon? I think, the level that was previously provided by you guys was about $1,200 per month. Has that adjusted at all? And can you just maybe comment on how the impact of pricing might be felt in the first quarter and then second quarter?

So Gene, as you -- I think what you're getting at is that historically, in the first quarter, we have had a bit of a volume dip related to patients needing to meet their deductibles again and a certain amount of insurance churn. And so there's no reason to think that we wouldn't have a similar type of dynamic. And when the deductibles are higher, then there tends to be higher utilization of our coupon program. And that can lead to a little bit higher gross-to-nets for Xyrem in the first quarter. So with the price increase that we implemented on Friday, we did also make the coupon program more generous. We adjusted the upper end to a maximum of $3,300 a month.

Your next question is coming from the line of David Amsellem from Piper Jaffray.

Just a couple. Just first on Xyrem, I just want to get more color on the reallocation. So you're going from 110 reps promoting Xyrem and LUVOX now to 80 reps, exclusively detailing Xyrem. So are there any risk in that sense of any disruptions in calls to physician accounts during that transition? And does that stand to reason that the 80 reps are going to have more call volumes into Xyrem, focusing -- just give me a sense how I should think about that?

Yes, let's let Russ take that question.

So as you knew, we were at 110. We brought it to 80. One of the things that we did was really look at the skill sets that exist in both of our psychology group and our Xyrem group. And we looked at those who we believe have a better skill set focused on Xyrem to continue on Xyrem. And as you will see, we basically kept the Xyrem at, what I would say, a minimum disruption rate. So there is some disruption that obviously takes place. If you looked at 3,000 physicians that exists, about 700 of which who represent about 70% of the business, there's only a handful of key thought leaders who actually will have a change in their existing reps. So we think the disruption is minimal, and we think we actually upgraded based on skill set.

Okay. That's helpful. And then just switching gears to Prialt. A couple of questions there. So one, it seems like the biggest issue for doctors, at least is what I've been hearing, is titrating to a safe dose. And so to that end, can you comment on some of the things you’re specifically doing to help doctors get more comfortable with dosing and minimizing adverse events through titration?

Yes. So you nailed it. So when the product was launched, the perceived dose was about 3x higher than what is currently being used today. And so they've adopted a go slow and continue to stay low. So what ultimately happens over time is that those who use a lot of Prialt have learned how to do that in a comfortable way. So some of the things that are happening is the pat [ph] guidelines recently released, where they actually talked about what is the right dosing schedule. And there is a tremendous amount of physician education on a peer-to-peer basis, talking about how to best do that.

Okay. One last one on Prialt. What kind of gross margins does the product have right now? And what do you think margins would look like at current pricing if you set up a specialty pharmacy distribution model for the product?

So we haven't dived in yet to product-level gross margins. They are attractive pharmaceutical product margins, and it's too early to talk about what those margins might look like under a different distribution model.

Your next question is coming from the line of Douglas Tsao from Barclays Capital.

I was just hoping, sort of sticking the topic of Prialt, with the increase in reps from 20 to 30, do you anticipate expanding the call universe? Or is this intended to increase the intensity or frequency, if you will, of the detailing?

Yes. So we're focused on maintaining the existing business, but also, expanding call universe. So if you look at the existing business, it's pretty clear that there was room for expansion. The analysis would tell you that a minimum of 8 additional reps was required to get to a universe that we think is more appropriate for Prialt.

Okay. And then in terms of -- also on Prialt, have you implemented any changes in terms of the reimbursement of the product or sort of means of facilitating reimbursement for physicians? Or is it simply been too early?

So we have not done that at this time. Although, when Azur took over the product, they did actually put an epic reimbursement group in place. It's run by Covance. Basically, it's running assignment of benefits and nothing beyond that. So that's essentially what is currently in place, and we are evaluating what else we could do.

Okay, great. And then, Bruce, if you could provide some perspective in terms of your thoughts for research and development? Since this year, you've obviously significantly expanded the team there, in particular, with the addition of Jeff. Just in terms of -- is this going to be programs-targeted on your existing products? Or is this going to be working in terms of -- or sort of a focus on the business development side of things?

So I would say, we definitely recruited new leadership. I would hesitate to say we substantially expanded the group, because the group hasn't really gotten bigger. In terms of where the focus of our efforts will be in 2012 and beyond, as you know, we're not starting with a robust pipeline of ongoing development projects, quite the opposite. So as we look for the best places to selectively invest in R&D programs, I think it's reasonable to say we will be looking to the outside world, in addition to taking a close look at the clozapine once daily program for potential advancement. We think there are going to be opportunities that are a good fit with our commercial focus, so would be detailed through highly focused, specialty physician groups where you've got differentiated products and good exclusivity in. And those are the characteristics we'll be looking for as we evaluate external opportunities.

Okay, great. And then finally, on the price increase for Xyrem, I believe it was a little earlier than has been the practice over the last couple of years in terms of the calendar year. Is there any reason for that? Or is it just how things shook out this year?

Well, March 1 would've been 6 months from our last price increase. So I think the timing wasn't intended to be, nor was it substantially different from what has been the pattern historically.

Your next question is coming from the line of Difei Yang from Auriga.

I have a couple of questions. The first question is related to the stock-based compensation. And I see, for Q4, the expense line has gone up significantly from the previous few quarters. Could you give us a little bit color? Is it a one-time deal, primarily associated with the Azur Pharma acquisition, so we would be expecting that number to go down in Q1 of this year?

Yes. So there was a one-time expense of $7 million in that line item in the fourth quarter related to a modification of stock options due to the Azur Pharma transaction. So that was a one-time charge. And as you know, we back that out of our adjusted net income and EPS.

And second question I have is related to the FDA warning letter, or that -- I think the last time we spoke about it, it's an ongoing process. Would you give us an update on where things are on that front?

Yes. So not a tremendous amount to report. You'll recall, we got the warning letter in October. We responded November 1 with what we viewed was a very comprehensive review of all of our ongoing activities, dating back to April and May of 2011 to strengthen our policies, procedures, personnel, systems sort of to holistically strengthen our adverse event reporting system and its robustness, both here inside the company and with our collaborators, including SDS. Since that time, we have provided additional information to FDA as we've completed various actions that we had committed to, as scheduled. We look forward to bringing this through to full resolution in a formal close out. As I've said to a number of you on several occasions, it may be a while before we get there, just because our commitments to FDA include not only taking all the actions that we already taken, but then ongoing monitoring to ensure that the effectiveness of all the actions we took is exactly what we would expect, again, both here and at SDS. And so there's an element of ongoing auditing and monitoring in the future, and I can't really predict how much FDA will want to see us complete some of those future activities before moving to a formal close out of this warning letter.

That's very helpful. And my last question is with regards to Xyrem price increase. Could you let us know what was the magnitude of the most recent price increase?

It was 19%, taken last Friday.

[Operator Instructions] Your next question will be coming from the line of Bill Tanner [Lazard Capital Markets LLC].

A couple of them, maybe, Russ, just for you. It seems like the new patient adds have been pretty consistent, I guess, over the last year or so in terms of each quarter, and wondering if that's kind of a reasonable sort of metronomic increase to expect? And I mean, is there any sense that you have in terms of what is a reasonable peak penetration, at least in the diagnosed narcolepsy patient population. I've got a couple of follow-ups too.

Yes, Bill. I think we're at about 19% now, given the 50,000 diagnosed narcolepsy patients that are out there and now being at approximately 9,300 patients as reported. But having said that, the consistent add is at, what we believe, a really nice consistent level. There's nothing that's really changed dramatically in the course of the last, let's call it, 6 months. There's a few programs that we have in place that we think are actually helping grow that. One of them is actually the new prospects that we put in place, middle of last year, that are now starting to pay off. And so as we look at it going forward, we think that, that's a number that you should probably be able to continue to count.

Okay. And then maybe, Bruce, just a couple of questions on the BD front. Wonder if you wanted to comment on the probability or the prospects that a transaction might be done this year? And just curious, if you could comment on your sensitivity to something being dilutive? I mean, it looks like most of the expectations would be for EPS potentially to be lower next year, I guess, as you pay tax for the full year?

So let me take the first part of that, and I'll take the EPS question and hand that over to Kate. In terms of our appetite to do a deal, we certainly think we're well positioned. We think we’ve got a strong balance sheet, a good corporate platform, a commercial organization that's proven its ability to handle specialty products, particularly that require a high touch. So we certainly feel like we're ready, and we've got great leadership, as Kate mentioned, in Eunan Maguire for this function. And I think amongst the team here, we'd be disappointed if we didn't get something done this year. But honestly, in the end, we're more concerned about doing a good deal than a quick deal. So we're not going to get pinned down that we'll definitely do one, because we're only going to do one if it make sense. And let me hand the second part over to Kate.

So, Bill, I think we've commented in the past that we're committed to delivering continuing growth in sales and earnings. And if you look at the amount of cash that we have on the balance sheet and the amount of cash flow, the amount of debt capacity, I think our preference remains to use cash for the next transaction. And to the extent that we're looking at acquiring products that are on-market or close to market, those would be likely to deliver earnings in excess of the cost of debt. So kind of the way I look at things, I think that it would be reasonable to think that we could be able to continue to deliver earnings growth.

So as it relates to something that's in-market, then the contemplation would be either that it would be a tuck-in, that it would utilize existing sales force? Or, I guess, the revenues that it would contribute would outstrip, if you will, the incremental OpEx spend that might be necessary to support it. Is that a fair way to look at it?

Yes. And I think, particularly with our new tax structure that we have as we model potential opportunities with the low cost of debt capital these days, and the fact that cash on the balance sheet doesn't return anything, it's very easy to get to earnings accretion.

And then maybe if I could just ask one last from Bruce, just -- or for Russ on the Prialt. Obviously, the year-over-year was up substantially 2010 versus -- or 2011 versus 2010, I guess the company having acquired it sort of midyear. But as you look at the fourth quarter then, is that what -- how should we think about the sort of the gross run rate going forward, off of fourth quarter '11?

Well, we haven't given product-by-product guidance for 2012 other than for Xyrem, given its materiality. So I can't give a specific comment other than we continue to think that there are initiatives that Azur has begun to roll out, and we're now going to continue together to roll out, together with the increase and the size of the sales force promoting the product, some improved medical education, other efforts we're going to roll out. We think all that put together is going to yield attractive growth of this product. But I've cautioned you that we're just rolling those things out now. And I think that's consistent, Bill. You've been following the company for a while. When we've rolled out some of the Xyrem-related initiatives, we've always cautioned that we don't see the result immediately. We see it over time. And so a little too early to tell exactly when we'll see it, but we're confident we will see it in the future.

You have a follow-up question coming from the line of Gene Mack.

Just on Prialt, go back a little bit. Can you just give us a sense of where practice guidelines are for the product right now and for -- if there's anything that exists for morphine-resistant patients that physicians are supposed to look towards? And do you have any ability to improve those or expand upon those in order to help reimbursement?

Yes, thanks for the question. So if you were to compare existing guidelines, meaning the new pat [ph] guidelines that were actually released in December of last year, it really is sort of a step forward for Prialt in terms of being first in pump, both for nerve susceptive and for neuropathic pain. As it relates to other possible non-opioid options in intrathecal therapy, they just frankly don't exist. So this allows Prialt to be in a position where we do think that, given the right education around how to use it, getting comfortable with the titration, and then overcoming some future reimbursement obstacles, that there is potential for growth.

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Jazz Pharmaceuticals' management for any closing remarks.

Thank you for joining our call today. We also want to remind you that we will be attending several upcoming investor conferences, including the Citi 2012 Global Healthcare Conference in New York this week and the Barclays Global Healthcare Conference in Miami in mid-March. Jazz Pharmaceuticals will also be participating in the National Sleep Foundation's annual Sleep Health and Safety Conference in Washington, D.C., which kicks off National Sleep Awareness Week on March 5 to 11, and National -- Narcolepsy Awareness Day on March 10th. We look forward to seeing those of you who will be attending these events. Thanks, and good evening.

Ladies and gentlemen, I conclude today's conference. We thank you for your participation. You may now disconnect. Have a great day.