Jazz Pharmaceuticals plc (JAZZ) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the Jazz Pharmaceuticals First Quarter 2012 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to Ami Knoefler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals.

Welcome to the Jazz Pharmaceuticals' First Quarter 2012 Financial Results Conference Call. We reported financial results in our press release issued earlier today. The release is available in the News and Investment section of our company website. Among other things, the press release includes a reconciliation of GAAP net income to adjusted net income for Jazz Pharmaceuticals plc, along with related per share amount. 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 may make on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to the future events, future financial results, growth potential, 2012 effective tax rate, financial guidance and the anticipated consummation of the proposed transaction between Jazz Pharmaceuticals and EUSA Pharma and the timing and benefits of the transaction. These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to differ significantly from those projected, including risks and uncertainties associated with the completion of the proposed acquisition of EUSA Pharma, including the timing and financing of the acquisition and risks related to disruption from the Azur Pharma merger and proposed acquisition of EUSA Pharma and related integration efforts, as well as risks and uncertainties related to Jazz Pharmaceuticals business generally, including our dependence on sales of Xyrem, competition, including potential generic competition, our ability to increase product sales, dependence on single source suppliers and manufacturer, our ability to protect our intellectual property and defend our patent and regulatory obligations and oversights. These and other risks related to our business are detailed in our SEC filings included -- including under the Risk Factors heading in our annual report on Form 10-K for the year ended December 31, 2011, that we filed on behalf of and as successor to Jazz Pharmaceuticals, Inc. Our SEC filings and reports are available on our website. 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-Q for the first quarter on behalf of Jazz Pharmaceuticals plc. Following some brief introductory remarks, we will open the call to questions. And now I'll hand the call over to Bruce.

Thanks, everyone. The first quarter was a dynamic time at Jazz Pharmaceuticals. We achieved a record total revenues of $108 million, fueled by the continued strong growth of Xyrem and the addition of new products in our portfolio from our merger with Azur. During the quarter, we completed the initial phase of integration of the Azur business, including the reorganization of our combined sales and marketing teams into 4 different product lines focused on narcolepsy, pain, psychiatry and women's health. We're pleased with the momentum of these new highly focused teams and continue to believe that increased specialization and focus will lead to better results. I'd like to thank our employees for their dedication during the merger process as many embraced new responsibilities while maintaining our commitment to patients and to our company's values. Now I'll make some comments about results and strategies for Xyrem and Prialt, as these are the current products we see as long-term growth drivers of our business. And then Kate will provide more details and summarize our updated financial guidance. Starting with Xyrem, as previously announced, we achieved 10% volume growth during the first quarter of 2012 over the prior year's first quarter. And the number of patients on active therapy reached a new high of over 9,500 during the quarter. This reflects focused efforts to maintain new patient growth and the results of ongoing programs to support both compliance and persistency. We continue to work with our exclusive Central Pharmacy to optimize its interactions with both patients and physicians, and we continue to roll out new programs to support the Xyrem brand. Most recently, effective March 1, we identified and rolled out to our sales force another wave of additional target physicians who treat narcolepsy patients, further increasing our target audience. Since we began this initiative to identify additional narcolepsy prescribers last year, we've increased our call audience by approximately 25%, or about 1,000 new physicians, over 100 of whom have since enrolled in the Xyrem Success Program. These additional potential prescribers have resulted in meaningful increases in new patients on Xyrem therapy with at least 50 new patients directly linked to this effort. We have also recently implemented a new patient support program called the Xyrem Patient Connection Program. This program provides new patients with the option to speak with someone who also has a diagnosis of narcolepsy and has personal experience with Xyrem therapy, yet another example of our commitment to the narcolepsy community. We are also increasing our work with the scientific and medical community related to narcolepsy and its impact on patients. We are increasing our investments in support of Xyrem across the company as we expand our support of medical education initiatives and increase our corporate commitment to serving patients with narcolepsy.We are hiring additional medical scientists, funding additional speaker programs and symposia with KOLs, pursuing additional publications and funding narcolepsy patient support groups and the charitable organization that supports narcolepsy patients. We will have our largest presence to date at the upcoming APSS SLEEP Meeting in Boston this June, where in addition to our commercial and medical affairs activities we are sponsoring a physician education symposium on narcolepsy. Now turning to Prialt, our product for severe chronic pain. We continue to focus on growing the existing business while we develop a broader strategy to maximize the longer-term opportunity for the product. Prialt sales volumes in the U.S. were up 8% year-over-year in the first quarter, which was in line with our expectation. Given that Prialt is the only non-opioid approved for intrathecal administration, its strong efficacy profile and the current very low penetration in the available pump market, we see significant potential to grow this product over time. We think that the optimal strategy for this product may include both changes with the existing, highly-fragmented distribution system and possibly generating new data. We have concluded that a more focused specialty pharmacy model may have advantages for patients and physicians, and we are in the process of planning for a possible change late this year. Under Jeff Tobias' leadership, we are also evaluating whether additional clinical data might be useful for physicians and obtainable with costs that makes sense. We expect to have more to say about our Prialt strategy later this year. And finally, we are pleased to have signed the agreement late last month to acquire EUSA Pharma, which we expect to contribute further to our top and bottom line growth going forward. The EUSA Pharma business would add a significant growth product, Erwinaze, to our portfolio and bring some interesting research and development opportunities into our company. The transaction meets our corporate development objectives and aligns with our commercial strength in delivering highly specialized products that require an expertise with targeted physician customers and a strong patient service capability. The transaction would leverage our existing commercial expertise and corporate structure and will be expected to generate a highly positive return for our shareholders with immediate accretion to our adjusted EPS. We've begun working with EUSA's management team to ensure a smooth transition and continue to expect to close the transaction in June. Now let me turn the call over to Kate.

Thanks, Bruce, and good afternoon, everyone. The year is off to a strong start, and today we are increasing our sales and earnings guidance based on strong Xyrem performance. Net sales for the first quarter of 2012 were $107 million, including contributions from the acquisition of Azur. Note that contributions from the former Azur business are included from January 18, so they were for only a partial quarter. To reference, we have provided the prior year's full quarter results for each of the former Azur products in a footnote in the financial tables accompanying our press release. We were very pleased with the strong Xyrem sales of $73 million in the first quarter of 2012. Year-over-year volume growth of 10% was in line with our expectation for high single to low double-digit growth this year. For the past few years, we have seen a sequential decrease in volumes from Q4 to Q1 that we have attributed to the impact of changes in patients' insurance plans and new deductibles. This year, we were pleased to see only a slight volume drop from the fourth quarter of 2011 to the first quarter of 2012. We attribute this to improved efforts through our pharmacy to address any changes in patients' insurance plans and to ensure timely shipments to patients. Our psychiatry products, which include LUVOX CR, FazaClo LD and FazaClo HD, reached approximately $18 million in sales. LUVOX CR sales were up 34% year-over-year, while the FazaClo products were relatively flat overall. As a reminder, the lower dosage strengths of FazaClo are subject to potential generic competition as soon as July of this year as a result of a settlement with Teva. First quarter 2012 Prialt sales of $9.5 million included $4.6 million due to our product supply agreement with Eisai for Europe, where Prialt is sold in about 10 countries. We think that this shipment to Eisai is likely to satisfy their needs for at least the balance of this year. Sales of the women's health and other products were $6.7 million compared to $8.6 million in the first quarter last year as growth of Elestrin was offset by declines in other products. Total gross margin for the quarter was 90%, which was impacted by $2 million of noncash expense due to purchased accounting inventory fair value step up. There is an additional $7 million of this noncash expense to be reflected over the next several quarters as the inventory is sold. R&D and SG&A combined for the quarter were $51 million, which reflects the combination with Azur, including an additional 170 employees. We also included $6 million of transaction-related expenses, most of which are related to the Azur merger, and $3 million of stock-based compensation expenses, both of which are added back to adjusted net income. We also recorded a provision for income taxes of $5.5 million, which reflects our mid-teens estimated 2012 effective tax rate. Turning to the bottom line, we are very pleased to report GAAP net income of $28 million or $0.48 per diluted share for the first quarter of 2012 compared to $22 million or $0.48 per diluted share for the first quarter of 2011. Adjusted net income for the quarter was $53 million or $0.91 per share, an increase of 54% over the prior year. Our press release issued earlier today has further results and a full reconciliation of GAAP and non-GAAP financial measures. We ended the quarter with $244 million in cash and investments and no debt. During the quarter, we used $25 million in cash to pay withholding taxes related to certain exercises of employee stock options in connection with the Azur merger. This net exercise transaction was priced at $48.60 per share and resulted in about 500,000 fewer shares outstanding. We are updating guidance today based on our current business, not yet reflecting the impact of our potential acquisition of the EUSA Pharma. The increase in sales guidance of $20 million to $35 million reflects the anticipated strong performance of Xyrem. We've also narrowed the guidance range significantly as we are further along in the year and the commercial integration with Azur is complete. The increase in operating expense guidance of $15 million to $20 million reflects increased investments we plan to make in support of Xyrem and Prialt, increases in hiring across the company to support current and planned growth, higher charitable contributions to a narcolepsy-specific organization and higher stock-based compensation expense due to the increase in our stock price this year. On the bottom line, we have increased our guidance for adjusted net income by $15 million, resulting in a $0.25 increase in adjusted EPS to a new range of $4.25 to $4.40 before including the expected accretive impact of the EUSA transaction. On a GAAP basis, we expect net income in the range of $165 million to $177 million or $2.75 to $2.95 per diluted share. These are very exciting times for Jazz as we execute on our strategy to grow our existing product portfolio while leveraging our expertise and financial strength to add additional marketed or close-to-approval product. We believe we can continue to create shareholder value as we pursue our mission of improving patient lives. Thank you for joining us on the call today. I will now ask the operator to open the line for your questions. Operator?

[Operator Instructions] The first question comes from the line of David Amsellem with Piper Jaffray.

Just a couple. First on the Xyrem patient growth, do you think that a lot of the patient growth is a function of finding these new doctors who are new to the product or are you still getting traction from existing prescribers who are just using the drug in more patients? How should we think about that?

David, this is Russ. I think you should think about it as a combination, but I think what you'll notice from the additional patient growth is that, we've mentioned that approximately 10% of the new physicians are actually enrolled and about 50 of those have actually engaged in some type of prescription. That's a part of it. The bigger part of it is that we're seeing more and more growth from, what I would say, less high-tiered physicians. So we're doing a better job than those who didn't have as much experience with Xyrem historically. And then in addition, our compliance and persistency programs continued to keep patients on longer, so its a combination of the 2.

Okay, that's helpful. And then another question on Xyrem. How should we think about the gross to net spread on the product as 2012 progresses? In other words, should the spread narrow in the second quarter and the rest of the year as it did last year? Or will you have a higher spread going forward due to the higher price point?

So this is Kate. So as is typical, the gross to net spread was a little bit wider in the first quarter. And we would expect, just like in prior years, that to narrow a little bit. Although we're not talking about big differences quarter-to-quarter, and we remain in the low double digits.

Okay. That's helpful. And then one last one, if I may, on Prialt. So can you give us a little color on what kind of traction you're getting in the field? And maybe quantify how many new starts you're getting on the product now that you've taken it over? And maybe just a follow-up to that when you think you'll complete the changes to the distribution model that you're contemplating?

David, I think we're very much in the early stage as it relates to implementation programs of Prialt. Keep in mind, the additional heads that we just put against Prialt, actually, are functional in their new territories as of one month of the first quarter. So we didn't expect to see anything from that. We also have data that would tell us that it takes about 6 months from the time that somebody starts on Prialt to actually having some meaningful impact in the field. So it's still very early stage in terms of when we would expect to see some return there. And we're doing the analysis currently on what is the appropriate timing for looking at changes in distribution. We'll talk about that more later.

Your next question comes from the line of Corey Davis with Jefferies.

Maybe I'll stick with Prialt, and curious that you mentioned possibility of new data. So any elaboration there? Is this something that you need more for promotion to the doctors using it or is it more for justifying the price to payers? Is it something about the correct dosing of Prialt or is it more on the efficacy of the drug that needs further clarification?

Yes, this is Jeff. And it's really some of those -- a number of different areas. There are remaining questions regarding dosing. And I think that additional clarity in that area could potentially have an impact on the ability to increase the use of the product. But other things that we're looking at are potential patient selection issues, as well as the role of how quick that could stand with the other intrathecal therapies at this time. So there's a number of different areas that we think we could have impacted.

Are these trials that would take months or years to complete, like single-digit millions or tens of millions?

It's really a range of options that we're looking at. Some of the questions can be answered by even retrospective short reviews. And it could range up to a randomized trial. So really, it covers the gamut.

Corey, this is Bruce. One thing I'd remind you of is the number of patients on intrathecal pump therapy is limited. And so most trials in this area you would expect to not be particularly large from a patient perspective.

That's correct. And it really -- some of these questions that we're not necessarily looking at pivotal-type trial.

And Corey, I'll just add that from a payor perspective, we don't feel we need additional data to convince payors at this point.

Okay, okay. And then I wanted to ask how you felt coming out of the Markman hearing and how important overall you feel the outcome there is to the success of your case and do you have any idea when the judge might offer his ruling on those claims constructions?

So nice multi-part question there, Corey. I would say, in general, we're not doing a detailed commentary around progress in the litigation. We're still at a fairly early stage in litigation that involves a number of patents, a number of claims, a number of terms. We don't know when the judge will rule, typically, measured in weeks to months but don't know whether that will apply in this case. This was one step along the way in litigation surrounding intellectual property. But, of course, overall we think this is a pretty unique situation involving both legal and regulatory matters -- proprietary and well-honed distribution system that's been in place for almost 10 years that we think does a very nice job of protecting both public safety, as well as safety of patients using the product. And we certainly think that's serving everyone well. And when it comes to the litigation, we're going to be very aggressive in defending our rights.

Your next question comes from line Gene Mack of with Mizuho.

Bruce, I wonder if I could just follow up on Corey's point there. Let's assume worst-case scenario of the judge. The judge sort of interpreted everything in favor of the challenger in this case. Would then the FDA still need to rule -- or in other words, the FDA would still then need to rule on its view regarding a duplicate distribution that work -- or duplicate Central Pharmacy in essence and then other REMS program. Does that sound reasonable?

Yes. Again, I won't do detailed commentary, Gene, other than to say you're correctly pointing out that there are a couple of separate processes here. One is potential outcome of litigation and the other is regulatory pathway and those, in some cases, are related but they're not one and the same.

All right. So the patents really wouldn't have any bearing on how the FDA viewed the creation of another Central Pharmacy?

I would say they're separate processes.

Okay. Also just on Prialt, before you mentioned that the intrathecal pump market itself was slightly limited, I'm wondering, do you see a potential of maybe growing the implantable pump market at all or are we kind of at steady state with the 70,000 that are sort of deployed right now?

We don't see tremendous growth there. You see models that have been growing anywhere from 1% to 3% per year.

Your next question comes from the line of Difei Yang with Auriga.

A couple of questions. The first one is related to Prialt. There's $4.6 million sales related to Eisai for selling in Europe, could you comment a little bit more? And moving forward, are we expecting this kind of revenue to be a repeatable event?

So yes, we're expecting it to be a repeatable event in that once they have exhausted their supply, we'll expect that they'll reorder and we'll supply more. Our expectation is that this shipment, for which we have reported the revenues, should satisfy their demand for this year. So we're not expecting additional revenues from this source until next year.

Well, thank you. My second question is on Xyrem. So after the price increase, what is the current price on Xyrem right now?

So the current price on Xyrem is approximately 30k to 55k depending on what your dose is. I would also say that our current bottle price is $16.35 per bottle.

The next question comes from the line of Bill Tanner with Lazard Capital Markets.

I've got a few, maybe, Russ, for you. Number one, could you tell us how many physicians are currently prescribing Xyrem?

Yes. We have a current culled universe of about 4,000 that we just characterize. Previously, that was about 3,000. If you really look at unique users, you can get anywhere from about 3,000 to about 3,200. And the majority of the volume comes from about 750 physicians. So that represents about 70% of the total.

Okay. And then just thinking about if you've gone to 1,000 new physicians, you've got 100 that have enrolled and 50 have actually started treating patients with Xyrem. What's the reasonable hit rate or conversion rate do you think out of that 1,000? Is this something that you've got 100 out of 1,000, that's kind of it, or do you think you'll build on that 100 out of those 1,000 over time?

I would expect it to build, but what I would say is that it's a very long process. Historically, we've seen that from the first time you call on a physician to the first time they actually start prescribing, it takes you about 6 months, even with somebody who's fairly receptive. I will say that we're having some good success, Bill, in getting physicians who have used the products 3, 4, 5 times who now use it significantly more. So our real goal with those folks is not for them to use it once or twice, it's for them to use it 4 or 5 times and then become a more meaningful user.

And that was going to be me question. So is it just a matter that the physicians are dipping their toe in the water and treating a few patients and seeing how well they do before expanding it?

Just getting rolling. And typically, after they've used it 4 and 5 times, they have at least that one patient that's traumatic and then they get it. So our goal is to continue to push them to getting to 4 or 5.

And do you have a sense out of that 1,000 physicians how many narcoleptics are under their care in aggregate or do you probably have a sense -- do you care to share it with us?

Yes, it's a big range. So I'm not sure it's going to help you much. You're going to see some that it's a handful and you're going to see some that are probably more like 8 to 10.

Okay. And then, I guess, the last one is, I think Bruce mentioned something about APSS, the presence there, wondering if you could sort of generally characterize what activities Jazz would be undertaking there and how that would be different from maybe what the company has done at the APSS in years past?

So, this is Jeff, in addition to the commercial boost and having a pretty robust medical cares presence, we'll have a number of our MSLs there, as well as some of our medical affairs division. We're also supporting a symposium, a semi-symposium that's going to be on narcolepsy and some really good speakers set up for that, but of course, we have nothing to do with that.

I think the point is we've got both a significant commercial and medical presence for the first time in several years.

And then maybe just a question, Bruce. And I don't know if you really want to answer it or not. But should we think that the company is sort of done this year in terms of acquisitions or in licensing with Azur closing and with EUSA or perhaps not?

Probably not a good question for me to answer, Bill. I'll say what I said post Azur and pre to EUSA announcement, which is, we feel our business is in good shape. I think you can see that from our current period results and from our guidance for the year even before transaction. Obviously, we're very excited about the EUSA transaction and think that's additive on a number of different dimensions. And coming out of that transaction, we'll again be in a position where I think the company is in strong shape to continue to execute on our top line and bottom-line growth strategy. But we'd be open to looking at additional transactions if they're a good fit with our strategy, affordable, good return. But we certainly aren't in need of doing something. So it would be only if we see a really great opportunity.

Your next question comes from the line of Michael Schmidt with Leerink Swann.

So I have a question on Erwinaze. As you're trying to better forecast that product, so now that it has been on the market in the U.S. for one quarter commercially, one full quarter, what's the average number of doses that you see per patient versus the comparison use program under which the product was available previously? I think the dose per patient was very widespread between 3 and 48 doses and do you still use your maintenance regimen as well or mainly in induction therapy?

Michael, this is Bruce. I'm going to cut Russ off before he jumps in to answer this question and just say at this point we've announced a pending transaction. We're expecting it to close next month. We certainly gave some information, including some financial highlights and some projections to get people's attention to the transaction. But I don't think we're going to start dissecting uses -- results to date to that degree yet. I think we'll have more to say at closing and going forward. So I'd like to wait until we've [indiscernible].

Sure. And on Xyrem, I was just wondering, with the generic for which you are now on the market, do you see any impact on prescriber behavior or maybe, payor scrutiny on reimbursement issues?

We haven't seen any such change. I will remind you that most Xyrem patients are actually on a combination of both a stimulant and on Xyrem. We don't see it as a direct competitor.

Your next question comes from the line of Douglas Tsao with Barclays.

Just first on Prialt, I might have missed it, but are you considering studies to refresh or update the label for the product? And I know in certain instances the drug is trialed not using any intrathecal pain pump, and I was just wondering if you're interested in perhaps pursuing those types of applications or getting approval for that use in that setting?

Those are areas that we're looking at. So as we look at how we want to proceed with additional studies, those are certainly 2 areas that are on our radar.

Okay. And then on Xyrem, and obviously the ongoing IP litigation. I was just curious, is there IP or patents that you have access to that are not, to protect the franchise, that are not in the Orange book?

Yes.

Your next question is a follow-up from the line of Gene Mack.

Sorry if I missed this earlier. With respect to EUSA and the integration, I guess, your guidance there. Did I miss when you would expect to be able to give us some idea of how it's going to impact your second, third and fourth quarters or is it going to be some part of the second quarter, given that you're expecting to close in June? Can you just clarify that for me, I guess I missed it earlier.

Yes. Gene, I don't think you missed this. What we see said on today's call is that we continue to expect to close the deal next month. And what we said on our announcement call was that our results, combined results for 2012 would depend in part on when we actually do close the deal. So one of the slides we made available including on our website in conjunction with that announcement was our expected results for the EUSA business as separate from the Jazz business for the full year of 2012 and how much of that gets rolled through our results will depend on the timing of the close.

Your next question comes from the line of John Boris with Citi.

I apologize if this was asked. I just got on the call late. But first, can you maybe characterize your thoughts around the Markman hearing, how that actually progressed? And then how you're thinking about different scenarios and/or outcomes going forward here during the 30-month stay?

So John, that was asked earlier in the call. So Corey Davis can give you a full de-brief at the end of the call. But I'll say, to put the joking aside, in general, we're not doing detailed commentary on the Markman. It's one step in complex litigation that could well go on for quite some time, lots of patents, lots of claims, lots of terms at issue and an overall situation that encompasses not only ongoing litigation but a regulatory pathway and other considerations. So not probably worth time doing a complete deep dive into the Markman. it's something that we're not going to comment on given the ongoing litigation.

Okay. A follow-up then, if I may. Just on thus asparaginase asset, some would argue that the 10 -- or the bearers would argue that the 10% to 15% hypersensitivity reaction sometimes occurs after patients have taken quite a few doses and it might be even potentially a lot smaller than that 10% to 15% mark. Can you maybe just provide some context that when you did due diligence around the asset, what gives you confidence that you're going to be able to grow volume with the asset going forward?

Yes. This is Bruce. Let me just jump in at a top level and say that we did significant diligence. But in this case, we also were relying on a lot of historical good information, whether that was compassionate use prior to FDA approval or in fact was actual results for a number of months post-approval. So we're not just projecting based on no real information. I think we've got good information to do that. You're pointing out correctly that there's a pretty broad range of potential use for patients, depending on a number of factors, including when that hypersensitivity is evident and treatment with Erwinaze begins, but also depending on characteristics of that patient under the treatment.

[Operator Instructions] At this time, there are no further questions appearing in queue.

Great. Thank you for joining our call today. We also want to remind you that we'll be attending 2 upcoming conferences, the Jefferies Conference in New York, and we'll also be participating in the APSS SLEEP Meeting in Boston next month. We look forward to seeing those of you who will be attending these events. Thank you and have a good evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.