Jazz Pharmaceuticals plc (JAZZ) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Jazz Pharmaceuticals Plc second quarter 2017 earnings conference call. Following an introduction from the company, we will open the call to questions. I will now turn the call over to Kathy Littrell, Head of Investor Relations at Jazz Pharmaceuticals.

Thank you, Kevin, and thanks to each of you for joining our investor call today. We reported our second quarter 2017 financial results and affirmed financial guidance in a press release. The release and the slide presentation accompanying this call are available on the Investors section of our website. With me for today's call are Bruce Cozadd, Chairman and CEO; Matt Young, our Chief Financial Officer; Russ Cox, Chief Operating Officer; Mike Miller, EVP of U.S. Commercial; and Karen Smith, EVP of R&D and Chief Medical Officer. Following some remarks, we'll open the call for your questions. I'd like to remind you that some of the statements we will make on this call relate to future events and future performance rather than historical facts and are forward-looking statements. Examples of forward-looking statements include statements related to our 2017 financial guidance and goals; the commercial launch of Vyxeos; our corporate development efforts; our growth strategy, future product sales, and volumes; future litigation and intellectual property-related events; future inventory and supply challenges; ongoing and future clinical trials; and other product development and regulatory activities and the timing of such events and activities. These forward-looking statements involve numerous risks and uncertainties that could cause actual events, performance and results to differ materially. These risks and uncertainties are identified and described in today's press release, the slide presentation accompanying this call, and under Risk Factors in our Form 10-Q for the quarter ended March 31, 2017, and our Form 10-Q for the quarter ended June 30, 2017, which we will file shortly. We undertake no duty or obligation to update any forward-looking statements we make today. On this call, we will discuss several historical and expected non-GAAP financial measures, including adjusted net income and related per share measures, and adjusted SG&A and R&D expenses, and measures derived therefrom. We believe these non-GAAP financial measures are helpful in understanding our past financial performance and potential future results. They are not meant to be considered in isolation or as a substitute for comparable reported GAAP measures. Reconciliations of GAAP to non-GAAP financial measures discussed on this call are included in today's press release and slide presentation, both of which are posted in the Investors section of our website. I'll now turn the call over to Bruce.

Thanks, Kathy. Good afternoon, everyone, and thank you for joining us. To date, we've had a highly productive 2017, with significant progress on our development programs and global regulatory efforts. Most recently, we were pleased to receive FDA approval for Vyxeos on August 3. I want to acknowledge FDA's efforts in connection with this NDA, which was approved approximately two months earlier than FDA's action date. We're also very grateful to patients and investigators who participated in the Vyxeos studies and to all who made this approval possible. Also, in early June, we presented positive results from four recently completed Phase 3 studies at the 31st Associated Professional Sleep Societies, or APSS, annual SLEEP meeting: three studies evaluating JZP-110 in patients with excessive sleepiness or ES, in narcolepsy and in obstructive sleep apnea or OSA, and our Phase 3 study evaluating Xyrem in pediatric narcolepsy patients with cataplexy. I'll now provide an update on key commercial, legal, regulatory, and clinical development activities and highlight some key upcoming events. I'll then turn the call over to Matt to review our financial results for the quarter and full-year financial guidance. In our sleep therapeutic area, Xyrem delivered 6% sales growth during the second quarter. Second quarter bottle volume growth for Xyrem was 2% compared to the same period last year. The average number of active Xyrem patients increased to 13,025 in the second quarter. Volume growth for Xyrem was impacted by payer mix, as it was in the first quarter. The large majority of business for Xyrem is from commercial payers, where we continue to see high and steady approval rates. Pharmacy metrics remained strong during the first half of 2017. We continue to expect Xyrem volume growth to improve over the second half of the year and to achieve full-year volume growth in the low to mid-single digits. For 2017, our efforts to grow demand for Xyrem are focused on increasing narcolepsy disease awareness, accelerating diagnosis, targeting sales force efforts on physicians with high narcolepsy patient volume and low Xyrem share, and reducing the burden of payer requirements on physician offices through education by our expanded and now fully staffed field reimbursement team. Next, I'll highlight our R&D plans for Xyrem and other oxybate-related programs. We presented data from our Phase 3 Xyrem study evaluating cataplexy and excessive sleepiness in pediatric patients at APSS in June. We remain on track to respond to the FDA pediatric written request and complete a supplemental NDA submission in the fourth quarter for a label revision to include pediatric data. Now we'll turn to a brief progress report on JZP-507 and JZP-258. JZP-507 has a 50% reduction in sodium content compared to Xyrem and has demonstrated bioequivalence to Xyrem in a pilot study. We expect to be in a position to submit an NDA to FDA by the first quarter of 2018. JZP-258 has a 90% reduction in sodium content compared to Xyrem. Patient enrolment continues in our JZP-258 Phase 3 study in the U.S. and EU, and we expect to complete this study in the second half of 2018 to support a planned NDA submission in 2019. Turning to a brief legal and intellectual property update on Xyrem. Patent litigation continues against four companies that have filed ANDAs for generic sodium oxybate, Amneal, Par, Watson, and Lupin. Trial could be scheduled in this consolidated litigation as early as the first half of 2018. In June, we received a Paragraph IV certification from Ascent Pharmaceuticals indicating that it had submitted an ANDA to FDA requesting approval to market a generic version of Xyrem. In late July, we filed lawsuits against Ascent. Turning to JZP-110, we presented positive data from our Phase 3 studies, TONES 2, TONES 3, and TONES 4, at the APSS meeting in June. Preparations are underway for our JZP-110 NDA submission for excessive sleepiness in OSA and narcolepsy. We recently completed the interim data analysis on TONES 5, our open-label long-term safety trial, and believe that we now have all of the clinical data necessary to support our planned NDA submission late this year. Finally, three JZP-110 abstracts were accepted for presentation, including two oral presentations, at the CHEST 2017 annual meeting in Toronto beginning in late October. Now on to the hematology/oncology franchise. Erwinaze sales in the second quarter of 2017 were consistent with the same period last year. We continue to experience supply challenges on a global basis and expect continued temporary disruptions in our ability to supply certain markets for the remainder of the year. Porton Biopharma Limited or PBL, our manufacturer of Erwinaze, and Jazz expect to meet with FDA in the third quarter to discuss the warning letter issued to PBL earlier this year. PBL has made progress on addressing the issues in the warning letter and has increased staffing and resources with the goal of ultimately increasing capacity and improving the supply of Erwinaze. With PBL's continued execution, the benefits of these actions may be realized in 2018, which would improve our ability to supply the needs of the market and build inventory. Finally, we continue to make strides toward our goal of developing an effective, well-tolerated, and long-acting recombinant crisantaspase through our expanded relationships with leaders in PASylation technology and expression technology. Through these collaborations, we look forward to potentially developing a new clinically meaningful therapeutic option for patients with ALL and other hematologic malignancies. Now I'll turn to Defitelio. We are a little more than one year into the launch of Defitelio in the U.S. We've made significant progress in our commercialization efforts, with 142 accounts having ordered product, representing approximately 85% of the total transplant volume in the U.S. We continue to see new accounts ordering Defitelio, with 11 new accounts in the second quarter, and good reorders, with 85% of accounts placing additional orders since launch. We expect continued variability in quarterly sales for products such as Defitelio, as veno-occlusive disease or VOD is an ultra-rare disease, and Defitelio is a product that is dosed according to weight, which varies considerably across pediatric and adult use. We expected that adoption in the adult setting would be slower than in the pediatric setting, and we're aware that some adult transplant physicians tend to watch and wait for spontaneous resolution of signs of VOD, while others will turn to Defitelio only when patients start to deteriorate rapidly. We continue to prioritize our U.S. sales initiatives to focus on educating healthcare providers for adult patients about the seriousness of VOD, the clinical benefits of initiating Defitelio treatment in VOD patients with renal or pulmonary dysfunction, and importantly the urgency to treat patients in a timely manner once diagnosed. In the EU and rest-of-world markets, our team remains focused on ensuring that physicians, key hospital administrators, and pharmacists are aware of the clinical and health-economic benefits associated with Defitelio. As we continue our global expansion efforts, we received approval to market Defitelio in Canada in July. We look forward to having Defitelio commercially available in Canada later this year. We believe Defitelio remains an important growth opportunity for us on a global basis. Finally, a brief pipeline update for Defitelio. Our Phase 3 study for the prevention of VOD in high-risk patients is enrolling well, and we are working on the study protocol for the Phase 2 proof-of-concept study for the prevention of acute graft versus host disease that we expect to initiate late this year. Now to Vyxeos. We're excited to be in the process of launching Vyxeos in the U.S., as we believe this is an important new therapeutic option for adults with newly diagnosed therapy-related AML and AML with myelodysplasia-related changes. If you missed the Vyxeos investor update webcast yesterday, please go to the Jazz website under Investor Events to hear a replay of the event and download the slides. Our key U.S. launch efforts are focused on 75 targeted accounts, representing accounts in accounts in deciles 7 to 10 by volume of treated AML patients. These accounts are in large medical centers, such as teaching hospitals, high-volume community hospitals, and some smaller private practices with multiple hematologist-oncologists. The U.S. launch initiatives include building awareness and establishing Vyxeos for the treatment of adults with newly diagnosed t-AML or AML-MRC, ensuring that Vyxeos is available to patients throughout their course of therapy, whether inpatient or outpatient, communicating the health-economic benefits of Vyxeos to payers and institutions through our field reimbursement team, and providing patient assistance programs to ensure that patients are able to receive Vyxeos when appropriate. As mentioned yesterday on our Vyxeos investor update webcast, we are planning to ship Vyxeos to hospitals and institutions this month. We also are looking forward to our planned submission of our Vyxeos EU Marketing Authorization Application, or MAA, in the fourth quarter following required pre-submission regulatory meetings. We look forward to the rest of 2017, as we prepare for multiple upcoming regulatory milestones and other events, including submission of the JZP-110 NDA to FDA by year-end; response to FDA's pediatric written request and completion of the sNDA submission for Xyrem for a label revision to include pediatric data in the fourth quarter; submission of the MAA for Vyxeos in the EU, also in the fourth quarter; preparation of regulatory filing for JZP-507; and continued enrollment in the JZP-258 Phase 3 trial and further potential corporate development transactions. In summary, we remain focused on our sustainable growth strategy. We continue to invest in our key products, future product launches, and R&D pipeline and remain committed to bringing additional meaningful products into our portfolio through corporate development activities, with the goal of further diversifying and expanding our product portfolio to fuel future growth and create long-term value. We believe that our strong balance sheet, development pipeline, approach to global molecule development, and growth prospects provide significant opportunities for Jazz to deliver value to our shareholders. Matt, let me now turn the call over to you.

Thanks, Bruce, and good afternoon, everyone. Our second quarter 2017 total revenues increased 3% compared to the second quarter of 2016. Net sales of Xyrem of $298 million were up 6% from $281 million in the second quarter of last year. We're maintaining our guidance for Xyrem net product sales in the range of $1.20 billion to $1.23 billion for 2017 and continue to expect volume growth in the low to mid single-digit range. We recently took a price increase of 2%. Turning to Erwinaze, second quarter net sales were $49 million compared to $50 million in the second quarter of 2016. In the second quarter of 2017, we continued to experience supply challenges and expect temporary Erwinaze supply disruptions to continue for the remainder of 2017. We are maintaining our guidance for Erwinaze net sales in the range of $205 million to $225 million for 2017. Worldwide Defitelio net sales were $30 million in the second quarter compared to $33 million in the second quarter of 2016. U.S. net sales in the quarter were $8 million, compared to $10 million in the second quarter of 2016. Remember, there was some initial inventory stocking at the distributor and in institutions in the second quarter of 2016 due to the launch of Defitelio in the U.S. that quarter. Ex U.S. sales volumes continued to grow in the second quarter of 2017 compared to the same period in 2016. However, net sales were impacted by foreign exchange headwinds. We continue to except intraquarter variability in Defitelio net sales, as VOD is an ultra-rare disease, and utilization is impacted by a number of factors, as Bruce mentioned. We're maintaining our guidance for Defitelio net sales in the range of $130 million to $150 million for 2017, with estimated U.S. sales of $45 million to $55 million. Prialt net sales for the second quarter of 2017 decreased to $6 million compared to $8 million in the same period of 2016, primarily due to inventory restocking in the first quarter of 2017 following a temporary supply disruption. For 2017, we expect continued top line growth and are maintaining our total revenue guidance in the range of $1.63 billion to $1.70 billion. At this time, we are maintaining our guidance for Vyxeos U.S. net sales in the range of $10 million to $20 million for 2017, given the very recent FDA approval. Turning to operating expenses, adjusted SG&A expenses for the second quarter of 2017 were $111 million or 28% of revenue compared to $99 million or 26% of revenue in the same period of 2016. The increase in adjusted SG&A was primarily due to the expansion of our business, including higher head count, our narcolepsy disease awareness campaign, and pre-launch activities related to our U.S. launch of Vyxeos. Our 2017 guidance for adjusted SG&A expense remains in the range of $440 million to $460 million or 26% to 28% of 2017 revenue guidance. Adjusted R&D expenses for the second quarter of 2017 were $35 million or 9% of total revenues, compared to $36 million or 9% of total revenues in the same period of 2016. Adjusted R&D expenses in the second quarter included costs related to our Vyxeos regulatory activities, our continued investments in sleep-related R&D programs, and the Defibrotide prevention of VOD study, as well as increases in head count required to support these activities. The completion of the Phase 3 studies of JZP-110 for excessive sleepiness associated with narcolepsy and OSA contributed to a decrease in adjusted R&D expenses in the second quarter of 2017 as compared to the same period in 2016. Our 2017 guidance for adjusted R&D expenses remains in the range of $165 million to $180 million or approximately 10% to 11% of 2017 revenue guidance. Second quarter 2017 adjusted net income was $157 million or $2.56 per diluted share compared to $166 million or $2.67 per diluted share for the second quarter of 2016. Adjusted net income per diluted share was lower in part due to our investments in expanding our field force in support of the Defitelio and Vyxeos launches, higher interest expense from the Celator transaction, and foreign currency adjustments. We are affirming our 2017 non-GAAP adjusted EPS guidance in the range of $10.70 to $11.30 per share. As of June 30, the outstanding principal balance of our long-term debt was $1.8 billion, and we had approximately $319 million in cash, cash equivalents, and investments and $750 million undrawn under our revolving credit facility. During the second quarter, we repaid $200 million under our revolving credit and used $17 million to repurchase shares at an average cost of approximately $151 per ordinary share. We continue to see an attractive dashboard of opportunities in corporate development, where our efforts remain primarily focused on further diversification by accessing novel technologies and adding to our key therapeutic area portfolios, innovative, medically differentiated products or product candidates that have long durability and can be marketed through targeted sales forces. We believe continued investment in corporate development opportunities can provide significant mid- to long-term growth drivers and strong return on investment for our shareholders. Thank you for joining us on the call today. And I'll now turn the call over to Kathy.

Thank you, Matt. We request that you limit your questions to one at a time and then feel free to reenter the queue if you have further questions. With that said, I'll turn the call back to the operator to open the line for your questions.

Our first question comes from Liav Abraham with Citi.

Good afternoon, guys. Can you just talk a little bit about the confidence that you have in the volume growth uptick required in the second half of 2017 for Xyrem in order for you to hit your full-year guidance? And then just very quickly, can you just confirm if there was any unfavorable impact on the top line from FX? Thank you.

So let me have Matt address that second part of the question first, which is unfavorable impact of FX on the top line. I'll just remind you that the largest portion of our revenue comes from Xyrem, which is essentially all U.S. sales and unimpacted, but maybe, Matt, you could comment on the rest.

Yeah, there was a small impact on the quarter with respect to top line relative to the second quarter of 2016, of just a little over $1 million with respect to Defitelio and Erwinaze in Europe principally, and average currency rates realized from the euro and the pound.

And, Mike, maybe to the first part of the question about confidence in the volume uptick on Xyrem in the second half of the year?

Sure, Bruce. So a couple of things that were mentioned earlier, let me color in a couple of those. So on the disease awareness campaign, some of the statistics through June 2017 or through Q2, we had 1 million website sessions, we had 38,000 screeners completed with indicating narcolepsy with cataplexy, and we had 26,000 doc lookups or physician finder hits. These are all indicators that the campaign is working and generating interest. We also completed it – by the end of Q2, we had expanded and fully trained our sleep arm team in place, and they were expanded from five to 11. The accounts that they call on so far have a higher PA approval rate and a faster time to a filled prescription compared to nation. So we're very pleased with that kind of response, which we think we'll see more of in the second half of the year. And lastly I would say that our early demand indicators are positive. We are seeing improvements in some of our enrollment trends and in persistency. So we feel confident on our ability to hit the volume guidance.

Thank you.

Our next question comes from Annabel Samimy with Stifel. Annabel Samimy - Stifel, Nicolaus & Co., Inc.: Hi. Thanks for taking my question. Just on Xyrem again, if you could just tell us, you mentioned earlier that the majority of your covered lives are commercial. So what exactly is the source of, I guess, some of the volatility within the payer mix that is causing some of that dislocation? And separately on Vyxeos, can you outline what kind of data you'd submitted to NCCN and what it could potentially cover going forward? And as for the de novo high-risk patients, would that be also covered by label or strictly the secondary patients? Thanks.

Okay. Mike, do you want start with payer mix on Xyrem?

Sure. So the overwhelming majority of the Xyrem business is commercial pay. Our commercial pay approval rates continue to be quite good, in the 80% range. So we're very pleased with that, and we commented that as in Q1 and Q2, we saw payer mix change.

So, Karen, maybe on the NCCN submission and what that might mean for reimbursement on the product going forward? Or Mike?

On NCCN?

Yeah.

NCCN, yeah. NCCN, it has been submitted. We'll hear in probably a month or two on that. NCCN really drives pretty much the protocols used in the U.S. for cancer treatment. We feel we have a good standing in our indicated population. And we'll look at the – we actually submit the totality of our clinical data to them beyond what just the label is, and they make a call.

There were five studies that were included, and all of the data from all five studies were included in the NCCN application. Annabel Samimy - Stifel, Nicolaus & Co., Inc.: Okay.

To answer the last part of your question, which was around the de novo patients in the Phase 3 clinical study, you asked about the MDS carrier types. They were actually included as part of the sub-categorization or the stratification of the Phase 3 study. So they are covered under the label.

Correct. Annabel Samimy - Stifel, Nicolaus & Co., Inc.: Okay. Thank you.

Our next question comes from Marc Goodman with UBS.

Yes, I was just curious on Xyrem, are you losing any patients to the clinical studies that are being run by your competitors? And, secondly, if commercial's doing so well and the government pay seems to be having trouble, is there anything you can do about the government pay?

Yeah, so, Marc, on the first part of your question, I don't have much to say about other folks' clinical trials, but we don't believe that's a particularly significant impact, and of course any projected impact was built into our guidance when we started the year. And, as you can see, we left guidance the same this quarter as it was last quarter. Mike, second part of the question on government pay?

On payer mix issue, we do have a number of services and support sites for patients to get product if they are a non-covered patient, and those are still offered and are used now. But the payer mix is one that has been consistent from Q1 and carried through Q2.

What is the volume growth in commercial?

So again, commercial represents virtually – well, the vast majority of our volume, and you saw our total volume growth of 2%, so that's essentially coming from commercial.

Okay.

Our next question comes from Jessica Fye with JPMorgan.

Hey, guys. Thanks for taking my question. Is there any difference in the price you realize between commercial and government pay patients? Just trying to kind of better understand this dynamic.

Yeah. So, on a net sales basis, there are differences across different payers. And of course you can track what's happened in general to our gross to net over time, but we don't break that out by every payer.

Okay. Thank you.

Our next question comes from Greg Fraser with Deutsche Bank.

Thanks. It's Greg Fraser on for Gregg Gilbert. On Defitelio, did pediatric use account for a majority of the sales in the U.S.? And then when do you think that your initiative to educate adult providers on VOD and Defitelio could start to lead to a shift in how those patients are cared for?

So two parts to your question. On the first part, I'm not sure we have hard data on percentage of sales, pediatric versus adult. We can infer something about that by looking at which institutions are ordering, and in general we know which institutions do all or most of their business in one or the other category. I think we said from the beginning we expected to get earlier traction in pediatric. Of course, on a per patient basis over time, an adult patient will consume more drug, and so that that will start to have a more significant impact. Mike, you want to talk a little bit about expected timing of impact of our adult-related efforts?

Sure. So we touched on – certainly the higher-volume transplant centers, the adult ones, wait a little bit longer to initiate therapy, and as a result Defitelio winds up being used in a sicker patient group, where the pediatric centers continue to be much more proactive in initiating the therapy. What we are doing is we're focusing on the severity of the disease and how deadly and unpredictable VOD can be. You'll actually see a new campaign on defitelio.com, and I think the messages are much more focused around our urgent treatment that we're tailoring directly to the adult audience. And we've expanded our speakers' bureau around adult-treating transplant centers.

Your next question comes from Umer Raffat with Evercore.

Hi. Thanks so much for taking my questions. And I have two, but fairly straightforward. One, Bruce, are you still making payments to Caring Voices (sic) [Caring Voice Coalition]? And secondly, in a scenario where there is a switch to low-sodium version of Xyrem, how does that impact your settlement with Hikma.

I'm sorry. Ask the second part of the question one more time.

Sure. So basically, in the scenario where you launch your low-sodium Xyrem next year and there's a meaningful amount of switch from Xyrem over to the low-sodium version, how does that impact the Hikma settlement? Like, do they have any guarantees in place on how much share they can have out of that low-sodium version as well, or is that not a possibility at all?

Okay. So on the first part of your question, our understanding is the Caring Voice Coalition fund, relevant fund, has been closed. Second, on the Hikma settlement, sort of a two part answer. Under that settlement, Hikma does not have any particular participation in or – well, our low-sodium programs, of which there are several, remain completely ours. I will point out there is what we would consider to be fairly typical market decline, a provision in that agreement, as there would be found in a number of brand generic agreements, which suggests that if total sales of the branded product, the Xyrem product, to which they are seeking a generic fall very significantly, at some point it would accelerate their ability to enter the generic marketplace. And that's not specific just to the low-sodium programs.

Got it. Thank you very much.

Our next question comes from Gary Nachman with BMO Capital Markets.

Hi. Do you have some flexibility with your expenses, so that if there are some headwinds in revenue, you can manage to the bottom line, or are you in a growth stage where you would want to spend through it? And then regarding Erwinaze, what's a reasonable timeframe to potentially have a new asparaginase product to replace that, now that you have a few programs in place?

Yeah, Gary. Good questions. On the first part of the question, do we have some room, and on the expense side, to manage that to match revenues. I would say, yes, we do. I think all companies do. I would say right now the types of investments we're making we're really excited to be making, whether those are supporting products recently launched or just launching now, supporting a new submissions of final regulatory documents in a number of our programs where we're submitting NDAs, sNDAs, MAAs to further our growth potential. And even some of our earlier stage R&D programs, we continue to feel, are both great products for patients and represent real growth opportunities for us. So in general I would say we're feeling really good about the investments we're making today, whether those are supporting our commercial products or our future growth prospects. That said, I'll point out our earnings guidance is unchanged for the year. So I think our expectations about the balance between revenues and expenditures, we feel good about for the year right now. On Erwinaze and potential future asparaginase developments, we haven't given specific timelines yet. It's just too early. As you may remember from long ago when we had a program called JZP-416, we talked a little bit about the ability to move fairly quickly through clinical and regulatory because of the well-known and demonstrated impact of asparaginase use on ALL patients. And so the design of those trials in terms of number of patients and what endpoints are required, tend to help you move a little more quickly than you might in a disease, where the ultimate benefit really is long-term survival.

Okay. What's the earliest that we could potentially see data on one of those programs? I mean just ballpark, is it a year, could it be next year?

Yeah, haven't said yet, although I'll point out we're still early in development.

Okay. All right. Thank you.

Our next question comes from David Amsellem with Piper Jaffray. David A. Amsellem - Piper Jaffray & Co.: So a couple questions on the low-sodium products. First on the 50% lower sodium product, do you have any expectation that you'll have a differentiated label for that product based on safety language? And then secondly, in terms of your end game for these products, I mean, is it reasonable to expect, if you got one or both of the products to market, particularly the 90% lower sodium product to market, that you would over time effectuate a hard switch and stop supplying Xyrem to the market? Maybe you can elaborate on that. Thanks.

Yeah. So on your first question, what specifically might be in a label in terms of a safety advantage, I'll just point out that having a product with 50% less sodium in it already, I think, is an important contributor to health of patients. There are well-established guidelines for maximum recommended daily intake of sodium. So maybe I can let Karen to give a few more thoughts, but I'll just start out with this lower sodium content in and in of itself I think is significant. Karen?

Sure. Yeah, absolutely, given the AMA guidelines around sodium intake, 2,400 milligrams, and looking at the sodium content of Xyrem, 50% reduction is certainly a significant improvement for those patients. And for a lot of patients who take Xyrem, they do have cardiovascular comorbidities; they are at a higher risk group. So I would think from a patient safety perspective as a treating physician you would want to minimize the risk to those patients. What the label would read like I think is something that has yet to be determined. And certainly for the 90% reduction, again, that would provide even greater benefits for those patients, and indeed for all patients. I don't think you need to be a patient with a cardiovascular risk in order to benefit from a drug that has a significantly high sodium load in its present form.

And the second part of your question, having not submitted NDAs yet or finished the clinical Phase 3 program for JZP-258, I think it's a little too early to start commenting on commercial strategy. We're excited about bringing forth products that we think represent a real improvement over Xyrem and can benefit patients, but more to say on that as we get closer.

Our next question comes from David Maris of Wells Fargo Securities.

Hi. A couple questions. So, first, congrats on Vyxeos, which is I think 13 or 14 years in the making. So we have this as a $300 million plus opportunity, and wanted to hear what you think, if guidelines pointed to a larger population. Is this something that's, one, possible, or, two, likely, and, three, how much larger of a population could that be? And then separately, just to beat the low-sodium horse further. Do you think that using the older version would be a liability for a physician? And, based on the safety, do you think that over time, you would withdraw the older version since on a relative safety basis, it would make no sense? Or is there some population that you think, well, some people need additional sodium, so they should use it?

I like that, David.

Sprinkle some on a pretzel.

Let me start with the low-sodium oxybate programs and then maybe come back to Karen a little bit on potential to expand Vyxeos' utility over time to a greater patient population. I don't want to comment on whether it would be a liability for a physician to use the original or higher-sodium product. Our goal would be to bring out a product that patients, treaters, payers, regulators, everyone would look at and say, that's a better product. And as potentially the marketer of both the original and the new, I think we'd have some ability to encourage people to use the product that in fact would be better for their patients. I don't know that we need to go all the way to saying it would be a liability to a doctor to use the other one. But I think our hope would be that people would see a real benefit in using the lower-sodium product. And is there any patient out there where a doctor would say, gee, I really want the extra-sodium version as opposed to take the low-sodium version and eat a little salt? I don't know. It's probably beyond my medical pay grade. Maybe, Karen, I'll have you take the Vyxeos question.

Yeah. Just to add a little bit onto that and the medical perspective associated with high sodium. I think it's well-documented, well-recognized as a major public health concern. The association between sodium intake and coronary heart disease and stroke has been well established. The AHA recently issued guidance. Their guidance was around reducing it to 1,500 milligrams. When you look at Xyrem, it has 1,640 milligrams per 9 gram dose. And so I think, as a physician, when they see the sodium intake, you look at the guidance being issued by AHA, then from a responsibility and a public health and safety perspective, you would have to look at a lower-sodium option as one that was better for all patients. I think to your question around if a patient were hypotensive, so could you, would you want to give them a higher sodium? There are other ways to treat hypotension beside saying, add salt to your diet. So I don't think the AHA would be inclined to give that recommendation to physicians. So the second half of your question that was more around Vyxeos and sort of considerations for how you would apply that, particularly in light of the other, newer approvals that have come through and the treatment options that are for specific patient populations, when you look at things like Rydapt, it's for newly diagnosed, it's with a FLT3 mutation, and it's with 7+3. And so when you look at Vyxeos and the response rate that has been seen in patients and the statistical significance versus 7+3, then I can see a lot of physicians wanting to leverage that as the backbone treatment for chemotherapy and the backbone for – instead of 7+3. And same for Idhifa, which was the other recent approval, and they were for IDH2 patients with that sort of a mutation or that carrier type, and again when you look at in a relapsed/refractory population. So as a physician, I could see them applying Vyxeos as the backbone – replacement for 7+3, and certainly using it as the add-on treatment, when you look at those defined patient population based on their carrier type, which is how treating physicians now characterize physicians. (42:49) It's what is their mutation, what is their carrier type, are they fit for treatment, are they high-risk, low-risk, and it's just part of the screening panel that is now done for these patients.

And, David, you'll notice I ducked your specific question about peak sales, but I will say we are very excited about this product in the U.S., but we're also excited to get it submitted in Europe later this year. And as you know, through a partnership we announced with Nippon Shinyaku early in the year, also pursuing Japanese introduction as well. So think it's a really nice opportunity for us globally. We think, as Karen just described, there's additional work we can do with the drug to make it useful to broader patient populations. And of course, as we talked about a little bit, although it wasn't the main focus of yesterday's call, we think the opportunity to use the CombiPlex technology platform to pursue other useful combination regimens for oncology or other indications could be a real opportunity for us as well.

Great. Thank you very much.

Our next question comes from Douglas Tsao with Barclays.

Hi. Good afternoon. Thanks for taking the questions. Just first on Vyxeos, Karen, you referenced the opportunity to use it in a combination therapy with some of the newer agents or recently approved agents. I was just curious, at a high level, when you start to add a lot of new novel agents, the price starts to escalate. Did you sort of think about that in terms of your pricing strategy for Vyxeos? Was sort of contemplating opportunity that it would be used in combination and that therefore – sort of what kind of payer research or sort of perspectives on that? That would be helpful.

So maybe I can start from a clinical perspective, and hand to Mike to talk about the pricing perspective. So absolutely. I think that there are a lots of opportunities for us from a development perspective, looking at this as a 7+3 backbone from a chemotherapy, you could certainly Vyxeos as a backbone to chemo, and used in combination with other agents, whether that's sort of a Rydapt, a midostaurin, an Idhifa, any one of those. I think that you could also look at extending the clinical benefits into other AML patient populations, other patient segments. You could certainly look at alternate dosing strategies, alternate dosing schedules. We do have some ISTs ongoing at the moment that are looking at this. We're looking at funding an additional number of co-op trials as well that are looking at some of these different patient populations and dosing regimes. And then the other place you could expand is into other hematological malignancies. So certainly a lot of opportunity for not only Vyxeos itself but also the CombiPlex platform. And I'll hand to Mike for the second part of your question.

Yeah. Thanks, Karen. When we did the pricing research on Vyxeos, we considered use alone, use in combination, and use in a number of different settings, both in- and outpatient. So we looked at it in many different ways. The health-economic data that was shared yesterday was versus 7+3 alone, and if, as we begin to develop Vyxeos more and in combinations, that health-economic quotient would then have to be recalculated with those combination agents based on that data. So I think we have a very compelling cost-effectiveness story today. And I think we have a great amount of interest on it.

Okay, great. That's helpful. And then, if you could provide an update in terms of commercialization of Defitelio in Europe, in terms of where that launch is and differences in how we should think about the U.S. launch trajectory compared to Europe?

Hey, Doug, why don't we let Russ take that one?

Yeah. Thanks, Doug. So, as you can see, we've had a lot more experience in Europe, and we've experienced some of the same things that we're seeing in the U.S. today. We saw the pediatric market get off to a fast start, and it took a little while for us to get to adults. We also saw at about a one-year period, we had a number of accounts that ultimately was scrutinized pretty heavily for use, and you can see they were about that same period in the U.S. So some of the things that we are experiencing in the U.S. today are similar to what we saw in Europe. I think the one thing that you can take from that is that as you continue to focus on severity of disease and you continue to focus on disease awareness and getting the adult segment to understand that there are patients that if you don't intervene will die, it makes a huge difference. And so that's been the focal point of the team in Europe, and they've had success with it.

Okay, great. Thank you.

Our next question comes from Ronny Gal with Bernstein. Aharon Gal - Sanford C. Bernstein & Co. LLC: Hi. Good afternoon, and thank you for taking my questions. I got two on Vyxeos. First on the realized price, I guess you told us the price is $7,750 per vial. I wonder if you have an estimate what happens if you kind of include the 340B, the Medicaid patient, patient assistance. If we kind of think about like price per patient, per vial kind of thing, what would it be? And, second, you kind of mentioned the ability to combine this drug with FLT3 and IDH2, and obviously there is a potential to actually show that this drug can be used as an outpatient as opposed to inpatient setting. I guess the question is, do you actually need to run trials to do that, or do you expect that the physician will kind of absorb that data based on investigator trials and just daily experimentation? Or do you actually have to do something before you can kind of broaden the market into those segments?

Want to take the first part of the question?

Sure. I just want to make sure I'm clear on the question. So the WAC price of Vyxeos is $7,750 per vial. It is dosed based on the number of cycles that you receive and your body surface area. And when you look across our clinical study and assume an average patient of 1.9 meters square, you get to 11 vials per patient used in the Phase 3. Aharon Gal - Sanford C. Bernstein & Co. LLC: Sure.

So that gets you to about a WAC of about $85,000. So hopefully that's helpful. Aharon Gal - Sanford C. Bernstein & Co. LLC: So I was actually asking, if you think about the $85,000 and you're thinking about the impact of 340B in Medicaid, how does that change the overall mix of kind of revenue per patient?

Well, it's not going to be – the gross to net is not going to be very different from Defitelio. Aharon Gal - Sanford C. Bernstein & Co. LLC: Great. Thank you.

Okay.

Our next question -

Hang on, we'll just let Karen answer the other part of that question.

So there were two other parts of the question. One was around inpatient versus outpatient. I think the decision as to whether or not to treat in or out is really up to the physician, and the fitness or score of that particular patient. So I can tell you that – also, some institutions are set up to treat on an outpatient basis; some institutions are not set up to treat on an outpatient basis. So there are several factors that feed into that decision. Also, when you consider the Phase 3 study, around 56%, so around half of the patients in the consolidation phase were treated in the outpatient setting. So we do know that some physicians did make that choice, although within the protocol of the trial, either was appropriate. So I think as physicians gain more experience with Vyxeos, again depending on the status of that patient, the ability to be treated in that setting, will make the determination as to whether they treat in or out. And then the second, or third, part of your question was more around the FLT3s and would we need to do clinical studies. Well, yes, you would obviously want to demonstrate in a clinical setting the efficacy and the safety associated with the product. What we can tell you is that, for example, FLT3, we do have a number of FLT3s in the Phase 3 population. The N was 42, so obviously it was a small number around that, if it was around 15%. We also had around 9% of the NPM1. So we did do cytogenetic profiling on the patients. Certainly there was a demonstrated difference in those FLT3 patients. The overall survival was 10 months in the Vyxeos arm versus 4.5 months in the 7+3 arm. So we did see that it had a very positive effect in those cytogenetic profiles for the FLT3s. I think more work, certainly the ISTs that are ongoing, certainly our future clinical development plans will provide more detail around those cytogenetic profiles for the patient segments.

Thank you. Our next question comes from Ken Cacciatore with Cowen. Ken Cacciatore - Cowen & Co. LLC: Hey, guys. I have a question on business development. It seems back in March – and I don't have the exact quotes – you were talking much more aggressively about potential near-term business development. In fairness, you didn't have the Xyrem settlement yet, or the JZP-110 data, or the Vyxeos approval. So just wondering, big picture, with all of those positive events and de-risking, how does this change your approach to business development? Does it make you think larger, smaller, riskier, less risky? Does any of these de-risking events really kind of change the composition of how you're higher approaching business development? Again, it seems that you were more aggressive then, and the language now has been more peaceful lately. So just wanted kind of a context around that. And then on your development pipeline chart, you have a footnote 3 under the once-nightly, narcolepsy oxybate program. Just wondering, you call out talking about deuterated. Are there more programs? Can you just explain why you have that footnote and kind of why only mentioning one program? Thank you.

Yeah. Ken, maybe I'll take that last part first. We've got a broad effort to develop a once-nightly program. That's got a number of pieces to it, including deuteration, including low sodium. It's a little bit earlier stage. We're not quite at the point we are with JZP-507 and JZP-258, where we're talking about regulatory filings and Phase 3 programs. So we haven't said more at this point, but it's a multifaceted approach.

And I'll let Matt see if he's going to have a peaceful tone to his corp dev comments.

So yeah, Ken, I don't think there really is any intended difference in tone. We remain active. We continue to be excited about what is an attractive set of opportunities in front of us. I have many times said I think it's very difficult to comment on timing related to certain business development transactions. And while we have indeed had some favorable de-risking events over the course of the year, we would have certainly felt fairly confident about some of those, as we made, for instance, our investment in the expansion of our field force around Vyxeos. So, while we didn't know the exact timing, I think we had pretty good conviction around a likely approval this year, as we did around some of our ongoing Phase 3 programs. And so I think we've really not seen much change in terms of both the size of things we'd contemplate, we continue to look at a range of opportunities on a size and risk perspective, and I would expect that to continue, so. Ken Cacciatore - Cowen & Co. LLC: Thank you.

Our next question comes from Irina Koffler with Mizuho.

Hi, thanks for taking the questions. I have one on Vyxeos and one on the shared REMS on Xyrem. So on Vyxeos, in order to book the revenues that you guided to for the rest of the year, is there – do you book some when you sell into the hospitals? Is there any interim administrative step that needs to happen, or is there any additional pull-through? Can you just explain the mechanics of that, because it's a new launch? And then on Xyrem, shared REMS, there was an FDA panel talking about companies obstructing generic access with the REMS program. So just wondering if this has colored your dispute with the FDA on the shared REMS and if there's any progress on that. Thank you.

Yeah. So let me take that second one first. On the recent commentary, and it's happened in a number of settings around REMS, I think people are focused on potential use of REMS in a way that inhibits generic competition. I would say most of that focus honestly has been on whether REMS prevent generic companies from getting access to brand drug to do necessary bioequivalence testing. That is not at all an issue that's germane to sodium oxybate. As you know, we have an important REMS that I think helps to protect patients and the public for a drug that is exceptionally helpful to narcolepsy patients. It makes a significant difference in their two major symptoms of excessive sleepiness and cataplexy, but has to be used carefully. And obviously if it gets into the wrong hands has other uses as well, and we feel confident that our system, which we've been operating for many years now, does a nice job of properly balancing the benefits and the risks of this agent. Do any of those comments go to what you described as an ongoing dispute – I can't remember your language with FDA. At this point, FDA has approved a waiver of REMS for a couple companies. We have argued that we would be prepared to look at potential shared systems that could operate and achieve what our REMS achieves. That's not ultimately the direction FDA went. Of course that REMS at this point exists only on paper. And we'll have to wait and see with ongoing litigation around IP and other things what happens in the long run. But we continue to feel the sodium oxybate REMS, which is a very specific REMS, serves an incredibly important purpose. And, Matt, maybe you can take the how the booking of net sales on Vyxeos works.

Sure. It'd work essentially the same as it does for Defitelio, in that we would book upon change in title and transfer to the distributor. We would not anticipate a substantial amount of inventory for a product like this, which accounts and institutions can order relatively quickly from the distributor. But you would see the distributor itself go a few weeks or a couple weeks of inventory, that they will size as demand grows over time, so.

Okay. That's helpful. Thank you.

Our next question comes from Ken Trbovich with Janney.

Thanks for taking the question. I was wondering if you could address whether you have run into any issues with regard to DEA licensing of the clinical sites for JZP-258?

No. No, I would say we've been working with sodium oxybate and oxybate as a schedule 1 API for many, many years and understand that any part of clinical development work in U.S. requires that, and we take that into account in our planning and in the timelines we give you.

Okay, and is their differentiation in between the U.S. and ex U.S. sites with regard to how quickly they are able to get up and running for enrollment in the study? Are you seeing differences there at this point?

So there are number of things that impact the ability of sites to get up to speed, but as we've said, we're pleased with how things are going with our JZP-258 trial and look forward to completing that.

Okay. Thank you.

And, operator, this will be the last question.

Our last question comes from Bill Tanner of Cantor Fitzgerald.

Bill?

Just had a couple for you, if I could, since I'm the last one. As it relates to – you mentioned on the pediatric sNDA filing, by the end of the year, seems pretty perfunctory, but I'm just wondering if there are someone underappreciated benefits of that. And then the second one is on JZP-507, just wondering if there's any opportunity to do any kind of disease awareness as it relates to the low-sodium aspect of the drug, ahead of the approval, or it's just something that people are just going to get as being pretty obviously better. Thank you.

So let me take part of the first one and then maybe ask Karen and Mike to just think about how people would come to appreciate the benefits of a lower-sodium product. On the pediatric sNDA, we're really excited about the work we've done here. We ran the largest trial ever completed in pediatric narcolepsy, an increasingly appreciated population of narcolepsy sufferers, and obviously presented those results at the June SLEEP meeting and learned some things about how to use the products successfully in that population, what you can expect certainly in terms of efficacy, but also importantly safety in that population. And we look forward to making that data more available in the label so that physicians can consider that when looking at how to appropriately treat their pediatric narcolepsy patients. So I'm proud of the work we did there and look forward to helping those patients as well. Mike or Karen on -

I'll jump in. So I think just in terms of how aware are physicians, I think those who are currently treating Xyrem patients, a lot of those patients are in sort of the 40 to 64 year age ranges, around half of them. The cardiovascular comorbidity rate for this age group is around 77%, and I think physicians are well aware of that. We talk to physicians and also to patients, and we've asked them, how would you like to improve this product if you could, as we do for all of our products. And one of the things that they mentioned time and time again is around the safety and the salt content of that particular drug. You know, they also mentioned things like convenience, obviously, but certainly the cardiovascular safety issue was prevalent to them. When we talk to physicians specifically around the sodium content and was it a deterrent to putting a patient onto Xyrem, they said around 20% of their patients that they could put on Xyrem by virtue of their profile, they couldn't use it because of the sodium content. And remember, this is a chronic disease. This is a treatment that they will be on for life. So we certainly know that it was an issue both for patients and physicians, and that's why, when we were looking at how to improve the product, the lower-sodium options were certainly ones that we felt were important for treatment options. Mike, over to you?

Yeah. Just – I do think that there's value in creating awareness around the dietary guidelines of 2,300 milligrams of sodium per day, and I think it's in patients over the age of 50 or with a diagnosed comorbidity, I think, it drops to 1,500 milligrams per day, which is something I think is very relevant. And I'm not sure physicians are taking that fully into context when they're evaluating these patients.

It is quite new; it's a 2015 guideline. So it's still a relatively new guideline. So I do think there is the opportunity to provide further education to physicians on those newer guidelines.

Okay. Thanks very much.

Yeah. So just before I hand it back over to Kathy, I'll just say coming into 2017 we thought this could be a really significant year for the company, and I'd say as we're coming up on two-thirds the way through the year, it has proven to be that, with the approvals of Vyxeos, Defitelio in Canada, with key data on JZP-110, Xyrem pediatric with new clinical trials for JZP-258, for JZP-110 in Parkinson's, upcoming study for defibrotide in prevention of acute GvHD, and the ongoing work with the prevention in VOD trial. And then we've got a lot of upcoming key regulatory events, with JZP-507, Xyrem pediatric, Vyxeos MAA, JZP-110, and then Matt's intriguing comments about corp dev. So when I think about all of that and the Hikma settlement, which wasn't that many months ago, it's been an eventful first part of the year, with a lot to come. And really proud of the work our whole team has been doing.

Well, and thank you all for joining us today. We will be participating in the Wells Fargo Healthcare Conference next month, and we hope to see many of you. This now ends our call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.