Jazz Pharmaceuticals plc (JAZZ) Q2 2019 Earnings Report, Transcript and Summary

Welcome to the Jazz Pharmaceuticals Plc Second Quarter 2019 Earnings Conference Call. Following an introduction from the company, we will open the call to questions. I will now turn the call over to Kathee Littrell, Head of Investor Relations at Jazz Pharmaceuticals.

Thank you, Valerie, and thanks to those of you who are joining our investor call today. We reported our second quarter 2019 financial results and updated our financial guidance for 2019. The press release and the slide presentation accompanying this call are available on the Investors section of our website. On the call today are Bruce Cozadd, CEO; and Rob Iannone, Executive Vice President R&D, Matt Young, EVP and CFO, and joining for the Q&A session Dan Swisher, President and COO; Mike Miller, Executive Vice President-U.S. Commercial; Allen Yang, Senior Vice President Clinical Development and Acting CMO. I’d like to remind you that some of the statements we will make on this call relate to future events and performance, rather than historical facts and are forward-looking. Examples of forward-looking statements include those related to our future financial and operating results, including 2019 financial guidance and goals, future growth and growth strategy, product launches, sales and volumes, supply challenges, regulatory activities, ongoing and future clinical trials, and other product development activities and corporate development efforts. These forward-looking statements involve risks and uncertainties that could cause actual events, performance and results to differ materially. They are identified and described in today’s press release, in the accompanying slide presentation under risk factors in our Form 10-Q for the quarter ended March 31, 2019 and our Form 10-Q for the quarter ended June 30, 2019, which we will file shortly. We undertake no duty or obligation to update or – to update our forward-looking statements. On this call, we discuss non-GAAP financial measures. We believe these 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 the GAAP to non-GAAP financial measures discussed on this call are included in today’s press release and slide presentation available on our website. I’ll now turn the call over to Bruce.

Thanks, Kathy. Good afternoon, everyone, and thank you for joining us. This year, we've had significant achievements across all aspects of our business, including strong financial execution, expansion of our product portfolio, diversification of our development pipeline through internal and acquired R&D programs and continued global expansion. One of our most significant achievements was the approval and recent launch of Sunosi in the U.S. for patients with excessive daytime sleepiness associated with narcolepsy or OSA. For the remainder of the year, our focus will be on preparing an NDA package for JZP-258, advancing our R&D programs and planning for the potential approval of solriamfetol in the EU as early as year-end. We're pleased to welcome new executive leadership to the company including Rob Iannone, who's leading our R& D organization; and Nina Patel, who will lead our global legal department. After providing details on some of our commercial and regulatory activities, I'll turn the call over to Rob to provide an update on our development programs and then Matt will update you on our financials. We're delighted to be on the market with Sunosi in the U.S. and we'll begin reporting sales in the third quarter. As of July 8, Sunosi was available to retail pharmacies and our expanded sleep sales force began contacting health care providers. Over the first three weeks of launch, we've had Sunosi interactions with over 7,500 health care providers and good utilization of our sample program. We have implemented robust patient service programs for Sunosi, which aim to reduce out-of-pocket expenses to as little as $9 a month and discussions with payers are progressing with the goal of obtaining optimal patient access to this important new therapy. Just a few weeks into launch, we are pleased with the strong interest from health care providers as they increase their knowledge of and experience with Sunosi and how best to incorporate Sunosi in the management of their narcolepsy in OSA patients such as how to switch their patients to Sunosi from other medications and understanding Sunosi's clinical profile. Our medical team is working on a number of publications and other efforts to educate health care providers on the emerging science regarding the pathophysiology of EDS and OSA and the role of pharmacotherapy. Jazz will also be launching peer-to-peer Sunosi programs in the near future, training for the physicians is complete and scheduling is underway. Additionally we are pleased with the response to Jazz's consumer disease awareness effort a different kind of tired. In the first half of this year, the campaign reached over seven million people and nearly one million unique visitors have visited www.adifferentkindoftired.com to learn more about their EDS in OSA. We're closely monitoring the launch and leading metrics to evaluate Sunosi's progress. We are encouraged by the positive feedback and interest we've received to date and look forward to reporting our progress next quarter. On the regulatory front, we submitted an MAA for solriamfetol in November and we are expecting an EMA marketing authorization decision as early as the end of this year. We have added key sleep leadership to our EU team as we prepare for initiating a rolling launch in major EU countries next year. We are continuing to evaluate development program opportunities for solriamfetol in other conditions associated with debilitating EDS. We're currently discussing with regulatory agencies a program to evaluate solriamfetol for EDS in major depressive disorder. Xyrem performance was strong again in the second quarter with bottle volume growth of 5% compared to the same period last year. The average number of active Xyrem patients increased to 14,700 up 6% compared to the same period last year. Our expanded sleep sales force is fully trained on Xyrem and Sunosi and began promotional efforts for both products in their new sales territories last month. We have increased our Xyrem media promotional efforts with the goal of maintaining the momentum from the first half of the year while minimizing any short-term disruption that can occur from changing territories. We look forward to a potential longer term positive contribution from this. Now on to our HemOnc therapeutic area. In the second quarter, Vyxeos sales benefited from our ongoing EU launch. We made progress on the pricing and reimbursement front from Vyxeos, obtaining national reimbursement in Italy. In France Vyxeos did not qualify for central reimbursement but will be funded by hospital budgets similar to other recently approved AML therapies. Our EU team continues pricing negotiations in Germany and Spain. In the U.S. demand trended upward particularly in community accounts where we've continued our intensive education and outreach initiatives, emphasizing the strong overall efficacy profile of Vyxeos as the first-line therapy for secondary AML patients. Our most recent U. S. market research and secondary AML indicates that our educational efforts are shifting use from 7+3 to Vyxeos. In order to increase our share of voice in the AML setting, we are expanding our Vyxeos dedicated sales force by 15 representatives. We plan to hire and train these new reps this quarter and expect them to begin promoting Vyxeos in the fourth quarter. Defitelio continued its strong global performance in the second quarter. In June, Defitelio was approved for the treatment of VOD by Japan's Ministry of Health Labor and Welfare and we began shipping commercial vials to Nippon Shinyaku who is responsible for the commercialization of Defitelio in Japan. We are continuing to make progress with our global expansion plans for Defitelio and recently requested marketing authorization in Australia and Switzerland. Our global defibrotide development program continues to advance. Startup activities are underway for our exploratory Phase 2 study and prevention of CAR-T associated neurotoxicity and we expect sites to activate this quarter. We are also preparing to activate sites for our Phase 2 study for the treatment of TA-TMA late this year. Patient recruitment is ongoing in our Phase 2 prevention of our acute GvHD study and our goal is to complete enrollment at the end of the year. Enrollment in the prevention of VOD Phase 3 study has been strong. The study includes an interim analysis. We expect to have an update on the timing of the interim analysis later this year. For Erwinaze, we experienced an extended out-of-stock in the second quarter due to ongoing issues at the sole manufacturer PBL and we continue to expect further supply disruptions this year. Erwinaze has been the cornerstone of our hem/onc franchise since 2012 and remain a critical component of treatment for patients with ALL. We remain committed to working with PBL and taking steps within our control to improve the reliability of Erwinaze supply and to ensure that all available supply is made available to patients. I'll wrap-up by saying we're proud of our significant first half achievements. We remain on track to deliver more than $2 billion in revenues this year, while expanding our business and capabilities, advancing our global R&D efforts, and successfully executing our multiple ongoing and planned commercial launches. Rob, I'll now turn the call over to you.

Thank you, Bruce. I'm excited to have joined Jazz that we have committed incapable R& D team focusing on advancing the development of life-changing medicines for patients. In 2019, we have made progress in further diversifying our growing R&D pipeline with the addition of the Pan-RAF inhibitor program and our exosome therapeutics collaboration. I'll begin the development activities in our sleep therapeutic area starting with JZP-258. We are continuing to make progress toward bringing JZP-258 to narcolepsy patients. JZP-258 is a novel oxybate formulation with the unique composition of cations resulting in 92% less sodium than Xyrem. Most patients taking Xyrem receive between 1,100 and 1,640 milligrams of sodium per night for the medication alone. To put that in context, the American Heart Association recommends a daily sodium intake not to exceed 2,300 milligrams with an ideal limit of 1,500 milligrams. Narcolepsy is a chronic disease in which lifelong therapy may be clinically indicated and researchers have associated narcolepsy with an increased risk of comorbid conditions including hypertension and cardiovascular disease. Many public health organizations, medical professional societies and patient advocacy organizations have highlighted the importance of sodium reduction to lower the risk of hypertension and cardiovascular disease. We believe that a substantial reduction of sodium intake for oxidative patients to a range of approximately 88 milligrams to 131 milligrams of sodium per night of JZP-258 represents a meaningful benefit for narcolepsy patients. We believe JZP-258 is a prime example of innovating to improve upon available therapies. In this case, by reducing the inherent risk associated with excessive sodium intake. Data from our Phase 3 study evaluating JZP-258 for the treatment of cataplexy and EDS in adult patients with narcolepsy has been accepted for oral presentation during the World Sleep Congress on Wednesday, September 25, in the afternoon. We also expect to meet with FDA in the fourth quarter to discuss our NDA package, with the goal of submitting as early as year-end. The Phase 3 study of JZP-258 to patients with idiopathic hypersomnia is enrolling well and we recently activated study sites in New York. Additionally, JZP-258 recently received Orphan Drug Designation from FDA for the idiopathic hypersomnia indication. Turning to our HemOnc development activities, I'll start with Vyxeos. At ASCO in June, the Children's Oncology Group, COG presented positive Phase 2 and 2 data of Vyxeos in children and young adults with relapsed/refractory AML. Primary objectives were focused on safety and efficacy including determining the recommended Phase 2 dose. Vyxeos was administered during cycle one at 135 units per meter squared. Diseases was then evaluated and patients continued with a combination of daunorubicin and cytarabine and fludarabine also known as FLAG. Toxicity was consistent with intensive AML regiments. The overall response rate based on CR, CRP and CRI was 81.1% with 70% of patients achieving best response after cycle one with Vyxeos. For patients, who achieved an objective response 80% have no residual disease by flow cytometry. The percent of patients who achieved MRD negative status was 75% after one cycle and 85% overall. Another important finding in the study is that 83.3% of patients successfully bridged the potentially curative Hematopoietic Stem Cell transplantation. This study was part of our pediatric investigation plan with the European Medicines Agency, and we expect to discuss these robust data with the regulatory authorities. We're also continuing to make progress in a broad development program to generate data to facilitate physician's understanding of the value of Vyxeos, to reach additional patients who may benefit from treatment with Vyxeos both as monotherapy and in combination, and also to satisfy our post-marketing commitments. During the second quarter, MD Anderson Cancer Center initiated a Phase 1 attenuated dose binding study of Vyxeos in higher risk MDS patients. This quarter, we expect to enroll the first patient in the Phase 1b study evaluating low intensity therapy Vyxeos in combination with venetoclax in first-line onset patients. Additionally, study sites have activated in two key cooperative group studies. Overall, there are currently 27 active studies. Now I'll turn to the recombinant crisantaspase development program. We are continuing our efforts to develop new recombinant crisantaspase product candidates with the goals of reliable and consistent manufacturing, quality and supplier processes and a compelling target profile. JZP-458 is a recombinant crisantaspase that uses a novel Pseudomonas fluorescens expression platform. We completed a Phase 1study of JCP-458 in healthy volunteers in the U.S. and the study met safety and efficacy parameters based on measurement of sheer asparaginase activity levels. Recently we met with FDA to discuss these results and agreed on a path forward for Phase 2/3 study design and expectation of required information to support a BLA. We will be working with COG and FDA to finalize the protocol with plans to initiate a single-arm pivotal Phase 2/3study later this year. Given the critical need for reliable therapy for patients who develop hypersensitivity to E. coli-based asparaginase, our goal is to continue to work closely with FDA, COG and other global experts and health authorities to bring this treatment option to patients as soon as possible. In R&D we are focused on building a broad pipeline across multiple therapeutic areas in stages of development to fuel Jazz's future growth. In an effort to expand our portfolio of early-stage precision oncology assets with high-value potential we completed two key transactions this year. The first was Codiak and its innovative Exosome technology for the potential treatment of hematologic malignancies in solid tumors. More recently we acquired RedX Pharma’s Pan-RAF inhibitor program for the potential treatment of RAF and RAS mutant tumors. RedX has made significant progress since prior published work and has matured the program to generate candidates with equal Pan-RAF inhibition. This advancement differentiates RedX's Pan-RAF inhibitors from other RAF inhibitors in development, and while early we believe there is the potential for development of a best-in-class Pan-RAF inhibitor. We are excited about these early-stage programs as they provide an opportunity to transform future cancer treatment. Now I'll turn the call over to Matt.

Thanks, Rob and good afternoon, everyone. In the second quarter we were pleased with our top and bottom line growth. Revenues increased 7% to $534 million, compared to $500 million in the second quarter of 2019. We are increasing our total revenue guidance for 2019 to a range of $2.07 billion to $2.15 billion from previous range of $2.05 billion to $2.13 billion. Now we'll talk about the performance of our key products. Xyrem delivered another strong quarter with net sales of $413 million up 16% from $356 million last year. As a result, the Xyrem strong performance in the first half of the year we are increasing our 2019 Xyrem net sales guidance of the range of $1.55 billion to $1.59 billion from the previous range of $1.53 billion to $1.57 billion and are maintaining our expectation for mid-single-digit volume growth. Turning to Erwinaze. Net sales for the quarter with $28 million compared to $59 million in the same period in 2018. Product availability in the second quarter was significantly reduced. We expect further supply disruptions for the remainder of 2019, which will continue to create quarterly variability. Even so we are maintaining our Erwinaze net sales guidance for 2019 in the range of $165 million. Second quarter Defitelio net sales were $46 million, up 14% compared to the same period of 2018, primarily due to increases in demand. Reported sales also included a shipment of commercial vials to Nippon Shinyaku, our partner in Japan as they prepare to launch Defitelio. We are maintaining our guidance for Defitelio net sales for this year in the range of $155 million to $180 million. Vyxeos second quarter net sales were $31 million an increase of 12% over the second quarter of 2018 and an increase of 8% sequentially from the first quarter primarily due to increasing contribution from EUs. We are maintaining our Vyxeos net sales guidance for this year in the range of $120 million to $150 million. As a reminder, our total revenue guidance for 2019 includes minimal net sales contribution from Sunosi which we launched in the U.S. in early July. We expect to gradual ramp up Sunosi net sales after 2019 as much insurance coverage expands and we believe Sunosi could achieve U.S. net sales of more than $500 million in its current indications in 2025. Turning to operating expenses, adjusted SG&A for the second quarter increased 13% to $105 million or 29% of total revenues compared to $138 million or 28% of total revenues in the second quarter of 2018. Adjusted SG&A expenses in the quarter increased primarily due to our ongoing and planned product launches and we expect these expenses to increase in the second half of the year. For 2019 our guidance for adjusted SG&A expenses remain in the range of $620 million to $650 million or 29% to 31% of total revenue guidance. Adjusted R&D expenses for the second quarter of 2019 were $56 million or 11% of revenue compared to $51 million or 10% of total revenues in the second quarter of 2018. Adjusted R&D expenses in the quarter reflected our growing investments in the development of defibrotide, Vyxeos, solriamfetol, and JZP-458, preparation of the JZP-258 NDA package, as was support of partner programs and IND-enabling work with the CombiPlex platform. We expect increasing R&D expenses in the second half as we continue to expand and advance our R&D programs. For 2019, our guidance for adjusted R&D expenses remains in the range of $235 million to $265 million or approximately 11% to 13% of total revenue guidance. We are maintaining our 2019 adjusted effective tax rate guidance in the range of 17% to 19%. On a GAAP basis, the effective tax rate included a one-time tax benefit of $112 million resulting from an -- intellectual property asset transfer in the second quarter. Adjusted net income for the second quarter increased 8% to $233 million compared to $215 million in the second quarter of 2018 and adjusted net income per diluted share increased 16% to $4.05 compared to $3.49 in the second quarter of 2018. As a reminder, our adjusted EPS for 2019 is possibly impacted by significant share repurchases made in late 2018 and the first half of 2019. Please note that we are maintaining our 2019 non-GAAP adjusted EPS guidance range of $14.30 to $15 and our guidance for weighted average diluted shares outstanding of approximately 58 million. In the second quarter of 2019, we generated $149 million in cash from operations. We used $60 million to repurchase shares during the quarter and had $208 million remaining under our share repurchase program as of June. During the quarter, we made milestone payments totaling $26 million related to the FDA's approval of Sunosi. As of June 30, we had $883 million in cash, cash equivalents, and investments borrowing capacity under our revolver of $1.6 billion and $1.8 billion in outstanding principal balance on our long-term debt. We're pleased with our strong companywide execution this year with multiple product launches underway and corporate development efforts that have resulted in the addition of novel potentially best-in-class product candidates and technologies to a rapidly expanding pipeline. As we head into the second half of 2019, we expect multiple catalysts to fuel our positive momentum. We look forward to several data presentations including JZP-258 and solriamfetol data at --. On the regulatory front, we are preparing an NDA for JZP-258 and expecting the EMA decision on solriamfetol as early as year-end. We're also looking forward to initiating the Phase 2/3 study of JZP-458. As part of our business strategy to drive shareholder value, we are focused on preparing for and delivering on successful product launches driving internal and external efforts to diversify our R&D and commercial portfolios and importantly prioritizing patients and their access to our differentiated medicines. Thank you for joining us on the call today. And I'll now turn the call back over to Kathy.

Thanks, Matt. We kindly request that you limit yourself today to one to two questions during this call, so that everyone has an opportunity to ask their question. We will gladly address any additional questions after the call or you can reenter the queue. With that said, operator please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Ami Fadia of SVB Leerink. Your line is open.

Hi. Good evening. Thanks for the questions. Perhaps, if you could provide us some additional details around the discussions with the FDA around the asparaginase study that you're going to run. Maybe give us some sense of the endpoints the duration of the study. And also how would the cost structure of – the cost of manufacturing this product look like relatively to your current cost of acquisition for asparaginase? Thanks.

So, Ami, this is Bruce. On the second part of that question, we're not going to release that in phase right now although we're designing this to be a modern production methodology – and we – but I can have Rob jump in and answer your question about size and endpoints on the JZP-458 Phase 2/3 pivotal trial.

Happy to Bruce. So for starters we have what I really feel was a very collaborative and productive discussion with the FDA so that we came away from that meeting having clarity around the study design that would ultimately support approval on the U.S. With that, we arrived at a single-arm design where the primary endpoint is asparaginase activity. We anticipate enrolling 100 patients. However, there is an opportunity for an interim analysis after 50 patients. That could support an earlier BLA submission.

Thank you. Our next question comes from Akash Tewari of Wolfe Research. Your line is open.

Thanks so much. So it looks like we'll get some readouts and approvals in the oral narcolepsy space in the back half of this year. How do you see these new treatment options kind of changing Xyrem's current market dynamics? Will they change it in any meaningful way? And then on 258 considering that you didn't run a head-to-head study versus Vyxeos, can you give us a sense of what other language you could get on 258's label outside of not including a warning on the high sodium content? Thanks so much.

Yes. On the first question about narcolepsy treatment options, of course, we're happy. We've introduced the number of new treatment options for narcolepsy patients already this year, starting with expanding the Xyrem label to pediatric patients and now launching Sunosi for EDS and narcolepsy patients as well as OSA patients of course. As we look at the potential expansion of the number of treatments for narcolepsy, we're reminded that narcolepsy remains an under-diagnosed and undertreated disease. And while Xyrem we think is a particularly effective drug for those patients that take it, you know that the number of patients that take that drug is small relative to either the number of diagnosed narcolepsy patients are the broader number of patients who suffer from the disease, but are not yet appropriately diagnosed and treated. And so additional treatment options, additional focus on the correct diagnosis and treatment of narcolepsy patients we think is a really important thing for the narcolepsy community. And we continue to want to be part of that conversation with our treatment. Maybe on your question on JZP-258, I can let Dan talk about that a little bit.

Thanks, Bruce. Just to remind people of the upcoming milestones on 258 so the Phase 3 data readouts that we've just given the top-line too will have that data presentation – oral presentation at the World Sleep Conference in September. We do have a scheduled NDA meeting with the FDA, pre-NDA meeting with the FDA in the fourth quarter and looking to put that package together and obviously we'll be in discussion with the FDA around label. It's a little premature to talk about that now, albeit that this was a pretty streamlined clinical study to get to initial approval with relevant endpoints that we've got in the Xyrem label but clearly not having the sodium content sodium level will be reflected in that label. I think increasingly we're also really looking at that data to think about what additional data do we want to generate both in real-world studies and how that how might that continue to supplement. What's on the market both in terms of label but also in publications.

Thank you. Our next question comes from Jessica Fye of JPMorgan. Your line is open.

Great. Good afternoon. Thanks for taking my questions. On 458, can you help us think about how long it might take to recruit that pivotal Phase 2/3particularly in light of the early supply issues? And second part was part of the company's focus is on driving global growth. Do you see any potential that this single are pivotal could support approval in Europe? Or would that take a subsequent trial? Thank you.

CEO, So, Jess I don't think we're going to provide a specific projection of enrollment time line for the 458 trial. We need to finalize that protocol, get sites open and start that process. We do believe there's strong interest on the part of COG membership on getting this trial up and running and we certainly expect that will go well. I will remind you this is an orphan condition. While it's the most common childhood cancer, there's still limited number of patients who would be eligible for a trial like this. But we're going to do everything we can to move this right along. Maybe I'll turn the global growth question over to Dan.

Yes. Thanks Jess. On the global growth side, just to really streamline our effort to get to market as quickly as possible, yes, we focused our regulatory interactions to-date with FDA. But we think the same market need, market conditions are similar in the other countries where both clinicians and regulators are looking for additional new treatment options that provide reliable, safe and potentially differentiated products. So we're actively planning now that we've got the FDA input, how we approach the other regulators and we'll update at future calls.

Thank you. Our next question comes from David Risinger of Morgan Stanley. Your line is open.

Hi, there. It's Zhu Shen for David Reisinger. I have two questions. The first one is are there any risks associated with the replacement components of the 258 formulation? And the second question is, when the 258 data is released in September how should investors assess its efficacy profile relative to Xyrem? Thank you.

So David on the cation mixture we've used to reformulate this innovative new product that we think provides this benefit of lower sodium, we certainly had in mind to do that in a way that would not introduce additional risk in the product. Obviously, we are collecting safety data in all our work, but we don't have any particular concerns in that regard. On how to think about efficacy, we talked about that a little bit when we released the top line data from the trial just to remind people that in addition to the primary endpoint pre-specified secondary endpoint. There's a lot of data we're collecting in this trial. Remember that, the trial design was for arms with patients entering either naïve already on Xyrem treatment or naïve or on Xyrem treatment with also anticataplectic treatment. And so we're really watching these different groups of patients as they enter their trial as they ramp-up on JZP-258 and as they either come off Xyrem or taper down on the anticataplectic. So watching each of those groups and looking at efficacy and tolerability over the run-in period both in this trial and then thinking about how that compares to what we would expect to see relative to prior Xyrem treatment or data we've had on naïve patients in the past gives us a lot of information. In the end the primary endpoint and the one that supports our regulatory strategy and where we gave you a sense for how the results came out of the trial was based on the randomization period at the end where we either kept people on 258, or randomize them back to placebo and we looked at what happened in the primary endpoint to cataplexy attacks over a two-week period. So we've already told you that part of the data was strong, but we look forward to presenting a little more information both at the World sleep Congress and as we move forward.

Our next question comes from Gary Nachman of BMO Capital Markets. Your line is open.

Hi, actually Gary Nachman. What is the early reading from payers on your WAC prices that you came out with the team pretty reasonable. Do you think coverage could happen a bit more quickly potentially then what you guys talked about? And are you starting to make some progress with OSA or focusing more on the beachhead and narcolepsy? How do you think those two markets are going to shake out? Thanks.

So Gary glad, we know your last name now. Thanks for that. Maybe I'll have Mike respond on payers and coverage speed side, and then Howard do the OSA.

Hey Gary, this is Mike. Yes. So I think the payer discussions have progress nicely. At this point, we are not giving any guidance differently than what we already have about it. It is -- I think the payers have responded well to the data. And I think importantly to your point when you think about narcolepsy and OSA, almost all patients are being treated with narcolepsy have EDS. So that is a natural beachhead as you said in our launch plans. Importantly though the real OSA market exists with the pulmonologist and that really, really opens up the opportunity for the brand. Those discussions have gone well. I think particularly the differentiated MOA, the robust efficacy in both indications, the lack of drug interaction and the 9-hour activities has been received well.

Okay. Thank you.

Our next question comes from Umer Raffat of Evercore. Your line is open.

Thanks so much for taking my questions. Bruce, I have two today and perhaps the first one is, what's the level of urgency in the organization on expanding the reliance of the P& L beyond Xyrem? Specifically in M&A, so for instance, should we be expecting a sizable transaction before year-end? Are you guys competitive in the valuation ranges you're looking at? I'm sure you understand a lot of investor concern around the reliance on the Xyrem franchise especially in the backdrop of how Vyxeos has been doing? And secondly the was a moderation in the pace of price increases for Xyrem last year, but I noticed with the July increase this year there's sort of a move back towards the 9% to 10% range. Should we expect that to be the norm now going forward again? Thank you very much.

Yes, Umer on the -- I'll take the second part of your question first. We for many years now have not commented on forward thinking on price increases. I think it's important to look at the situation when we arrive at a particular moment in time and do something responsible that supports our level of commitment to ongoing R&D to help narcolepsy patients. So I wouldn't think of this in terms of setting a new trend. It's just what we happened to do at this period. On your second question in terms of diversifying our top line, we're tremendously pleased by Xyrem's continued strong performance and we'd like nothing more than to see that continue in the years ahead as we expand into the pediatric population as we continue to try to help more narcolepsy patients with this product. Also remind you that under settlement agreements while there will be generic competition in the future that is still a ways off and includes a number of components including authorized generics where there are some economics to Jazz, and we've been talking of course about our efforts introducing an even better product for narcolepsy patients in the years to come. But that said we would love to build additional growth drivers into our overall business. We continue to look at that by growing existing products by advancing products in our R&D pipeline and by broadening our R&D pipeline. We remain interested in bringing marketed products or near market products into corp dev efforts as well, and maybe I'll ask Matt to comment on a little bit about our efforts there and how we think about market we're in today for those type of assets.

Yes. So I mean, we remain very enthusiastic about what we're evaluating and continue to build cash and firepower, currently at around $2.5 billion before any external funding. And again, those leveraged finance markets are relatively strong. We continue to look really across the spectrum of opportunities and believe we have both the capacity to evaluate and acquire a broad range of assets to build our pipeline or bring in product opportunities. So while we've done a couple of early pipeline-building transactions we're clearly very focused on larger and later stage opportunities as well both in ways to build upon our existing franchises and looking even.

Thank you. Next question comes from David Maris of Wells Fargo. Your line is open.

Good afternoon. Thank you. The Grassley widening proposal calls for manufacturers to exclude the value of coupons for the ASP calculation for Medicare Part B. So maybe can you talk a little bit about your overall Medicare exposure, Medicare Part B exposure? And any color on the use of couponing? I would imagine that's mostly related to Xyrem. So maybe what percentage of patients use coupons for Xyrem? And then separately, I don't know if you addressed this, but the Xyrem guidance assumes or looks to project that things are flat first year to the second – first half of the year to the second half of the year. Is there any reason for that? Or is it just conservatism? Thank you.

Yes. Thanks, David. On the first part of your question there are a host of possible outcomes to how the government approaches pharmaceutical pricing through legislative action or otherwise. We don't think that has landed yet and we may feel like we have direction, but I don't know where it's going to land. So rather than going through sort of a product-by-product mix and coupon discussion, I'll just say generally our products on average have a lot of commercial pay. I don't feel like we line up as a company particularly skewed toward any one piece of Part B, Part D or otherwise. I don't think we're at an extreme on any measure. So we like other companies are watching what is happening. I think we'll have a lot more clarity over the next few months as we move into the fall and toward the end of the year. And then maybe we can give you a better sense you and others the better sense of potential impact on the company. But in general, we don't think the types of things that are being talked about as we look at our current product portfolio would have an overly outsized result. On your Xyrem question maybe I'll have Matt address that.

Yes. Thanks, David. Just quickly, I'd say remember this is the first time we have had our field force in our sleep franchise focused on two products. So I think we want to make – count for uncertainties in that regard. And while there's nothing specific that portends what we're guiding to your question, we believe our guidance reflects a range of expected scenarios that could materialize as the year progresses and want to just take some of those nuances into account.

Great. Thank you very much.

Thank you. Our next question comes from Jason Gerberry from Bank of America. Your line is open.

Hey good evening. Thanks for taking my questions. Just the update on JZP-458. Can you confirm or clarify does this have any implications on the PBL agreement? Does this indicate that their bidding process has concluded? And if your pivotal trial is as accelerated as the Erwinaze pivotal trials were and you are able to get to NDA stage before end of 2020 does that have implications on the relationship? And then also outside of supply how might 458 differentiate from Erwinaze?

Yes, Jason maybe I'll ask Dan to take this question.

Thanks Jason for those questions. For a number of years now, we've been focused on looking at other recombinant approaches to crisantaspase programs and we're just happy that we've got now one that's moving from, good healthy volunteers experience into a Phase 2/3. We continue to believe short-term and longer-term that were a natural partner for PBL. We've built the market. We've got the KOL relationships. We've got regulatory filings in most countries, and so we continue to be involved with PBL both for short-term and long-term. In terms of the actual process, we can't comment on that. That's their process. But it is still underway and we are still engaged in that process. And in terms of differentiation it's a little premature now other than, obviously, high quality, reliability and much more modern manufacturing process, faster cycle times et cetera. So we feel very confident about the supply we would have and the ability to really grow the market into the EU segments into geographies like Japan where we've got approval but have not been able to launch. So there's a lot of opportunity to have a second product.

Okay. Thanks.

Thank you. Our next question comes from Randall Stanicky of RBC Capital Markets. Your line is open.

Great. Thanks, Bruce. First one for you is, we think about the upcoming FDA meeting for 258, what are we looking for? Should we think about this as largely foreign REMS? Or is there anything else we should be thinking about? And then secondly for Matt, SG&A stepping up in the back half over the first half about 10% at the midpoint. I understand there's a lot of infrastructure -- commercial infrastructure going into this. Last couple of years it’s been a little more flat second half over first half. Should we think about this back half SG&A spend as a new appropriate run rate going forward?

On the first part of your question, our pre-NDA meeting will just be focused on making sure we submit a high-quality package that's going to meet the regulators. We know, we think of this product has significant advance and we want to get it to patients, but we want to make sure we handle that regulatory interaction in the way that optimizes the ultimate review and approval of that product broadly including REMS. But I don't think that's a particular focus at this meeting so much as just making sure we're synced up across the board. Matt, on SG&A?

Yes, Randall. Certainly some of the investments we're making will be ongoing investments on a dollar basis for sure. And recall given the early July launch for Sunosi in the U.S. and the hiring of the field force just before that and then acceleration of sales expense but then marketing and medical expenses while that had been picking up even through part of last year, it certainly accelerates with the formal launch. We are also doing the market building in some of the hiring and activities in Europe in anticipation of our result in European theater later this year or early next. And so that's a big investment. And we – as we mentioned or making an investment behind Vyxeos commercially as well with an additional 15 reps, this – in the back half of this year. So again, those are costs, I would expect to be layered in on an ongoing basis that should support again a significant uptick in commercial performance.

Great. Thanks.

Our next question comes from David Amsellem of Piper Jaffray. Your line is open.

Thanks. So on Sunosi can you just remind us how long you're planning to sample aggressively and also how long you're planning to subsidize out-of-pocket exposure aggressively? Is that going to persist through much of 2020? And then secondly regarding competition and narcolepsy, cataplexy is what to extent would you think that pitolisant and Xyrem could potentially be complementary over the long term? And is that something you've given thought to? Thanks.

Yes. So David on sampling and patient access our goals out of the gate are to get good trial of this product. We think it's an excellent product. We certainly saw on our clinical experience the patients treated with Sunosi benefited significantly over time. We'd like to give HCPs and patients the opportunity to gain experience with Sunosi and that's underlying a lot of our early efforts. In terms of the degree to which we'll need to continue to do that Mike described our efforts to gain payer access over time and I think we'll watch out how that plays out over time, but that will certainly have an impact on how our programs work. On the potential for use of pitolisant with Xyrem my maybe I'll have Rob comment on how patients often use Xyrem in combination with other agents. I'll remind you that, we'll wait to see an ultimate approval in label for pitolisant before we can make more informed comments on that. But Rob maybe could address this generally.

Sure. Just to reiterate we know that patients who are on Xyrem often are also using daytime treatments. So that may will be the case with the pitolisant. That's an obvious need for the benefits for Xyrem overnight and we certainly think that's a possibility with Sunosi as well.

Thanks.

Thank you. Our next question comes from Esther Rajavelu of Oppenheimer. Your line is open. Please make sure your phone isn't on mute. One moment please. Our next question comes from Gregg Gilbert of SunTrust. Your line is open.

Thank you. Back on 458 and I assume we're talking about the longer half-life or half-life extended version here. Can you talk about how larger you think the market is when given a full supply scenario and whether there are any other products as part of your arrangement with Phoenix that you could speak to or are interested in? And my other question is about Vyxeos. Based on that very strong data in relapsed/refractory AML in young adults and kids plus your intention to file, can you put a little bit of context around the commercial opportunity? Thanks.

So Greg on your first question, JZP-458 is in fact not a longer half-life product. It's more similar to the Erwinaze product in that regard. We as you'll see in our slide deck that we make available on our website, we do have an earlier attempt to look at the potential for less frequent dosing of the product, which will be another advantage. But to be clear the one we're talking about taking into pivotal trial is in fact not that. In terms of how much larger the market is it's a great question. And I think Dan talked about the opportunity for multiple products on the market here. We haven't been able to meet existing market need that's caused us to certainly take our foot off the gas in terms of continuing to promote for expanded use of asparaginase in adolescent and young adult market. Dan specifically mentioned its limited ability to do geographic expansion with approval in Japan but no launch product. And even beyond that the ability to do additional clinical investigation of the product and potentially broader applications, I think could open up new use. So we think there's a significantly expanded market for use of asparaginases overall, and we think that JZP-458 could help unlock that potential. On Phoenix, I don't think we have that much more to say other than what we've said publicly before that the deals we've got with Phoenix are a little broader than just what we're talking about here. And in Vyxeos in terms of commercial potential, maybe I'll ask Allen to talk about that a little bit.

In pediatric population Bruce to clarify. Yes, so I think in the pediatric population AML is rare than ALL. So it is a small population. But I think what that ASCO data represents is an opportunity right that the drug is effective in pediatrics. So it's not the high-risk AML, the therapy-related AML or AML-MRC. This is a younger population with relapsed/refractory disease, different genetic profile and the drug is still highly active. And so it fits our hypothesis that this drug has wider implications outside of the current indication.

Thanks.

Thank you. Our next question comes from Annabel Samimy from Stifel. Your line is open.

Hi, thanks for taking my questions. Just to piggyback off of some of the narcolepsy questions for Xyrem. You mentioned how you're viewing the market evolution with new competitive entrants. Could you maybe give us a sense on how this might affect you a payer landscape? I mean, you've always been playing in the market for narcolepsy and just want to know if you expect any kind of rebate pressures on Xyrem if there's new options available? And then really on Vyxeos, I guess you kind of touched on this, but outside of the high-risk populations that you have, the city populations and with some of their new cities has there been any additional comfort to move Vyxeos earlier in treatment? And do you have any updates on the MDS study design? Thanks.

On Xyrem in terms of the payer landscape, again we view this as an important treatment option for patients. We have a number of patients who we think are well treated on Xyrem many of whom have been on the medication for a number of years. We think it's important to maintain that access. We're committed to that. I don't think I want to say anything beyond that in terms of particular pressure from payers. On Vyxeos, I'm not quite sure, I understand your question. Vyxeos is a frontline treatment. It's a frontline treatment for the secondary AML high-risk AML patients. But on your question on, what we're doing in MDS, maybe I could ask Rob to jump in on that.

Yes. So as we've mentioned in the prepared comments, we are activating through the MD Anderson collaboration study in MDS. And on that, Allen do you have any other studies?

Yes. I think we've publically disclose a randomized study that will be conducted in Europe by one of the cooperative groups. So just remember in MDS there is a fit population that is transplant eligible as well. So I think you could go with your current dosing regimen in that population. And then as Rob alluded to we have our collaboration with MDS, which is the MDS is usually a disease of older patients and those patients tend to be less fit. And so we'll have a number of activities exploring lower doses for those less fit patients sort of building on the data generated by Roland Walters and Jorge Cortes. And just to add, I think what you meant by earlier we are frontline therapy, but I think you're talking about standard risk in younger patients. And again, alluding back to the ASCO data from the Children's Oncology Group, I think one of the things that we're so excited about it, this is a difficult-to-treat population. They were relapse/refractory patients. This was used as a single agent in patients already exposed to cytarabine and daunorubicin. You had a very high CR rate. You had a very high MRD rate as well. And I think that gave the Children's Oncology Group confidence to test this agent in frontline and that's going to be moving to a large pediatric frontline study. And I think you'll see that as a common theme in other populations as well.

Yes. That's what I meant. Thank you.

Thank you.

Thank you. Our next question comes from Liav Abraham of Citi. Your line is open.

Good afternoon. Regarding JZP-258, Bruce would you consider using your review voucher for the FDA review of this drug? And how important is it for you to get 258 to market as soon as possible given some of the various considerations you have to take into account and commercializing the drug? Thank you.

Okay. Liav, great – great question. We haven't announced what our intentions are with respect to the PRV. We own – we think 258 represents an important advance for patients and we are looking forward to getting it to patients as quickly as we can. That said, there are a number of ways to do that and other uses we might have for that PRV as well. So I think we're going to avoid commenting more particularly on that at this point. But we do feel good about where we are from a timeline perspective that we've made rapid progress. I think, if you look back we enrolled our 258 trial well. Got the positive results. We're looking forward that data presentation next month now. And already are underway preparing an NDA. So we feel good about the progress we're making in that program and look forward to bringing it to market.

Thank you.

Operator, this will be our last question.

Thank you. Since there is no further questions, I'd like to turn the call back over to Kathee for closing remarks.

I think there's…

Do you want to go back to Esther and see if the line is unmuted?

Hey thank you so much for taking my question. Apology for earlier. Just a quick question on Defitelio. What was the segment benefit in the quarter? And did the quarter variability just for the remainder of 2019? Or should expect that to last longer?

Matt, are we going to characterize the…

Yes, I mean we still saw growth in both the U.S. and Europe on volume basis apart from that. And so I think importantly we're seeing growth across the board. So I wouldn't consider it material to the way we describe that quarterly results. And as it relates to inter-quarter availability that will be true with this product just given the timing of transplants and VOD being a relatively rare occurrence even within that transplant environment. So I think we will still see some effect of that just based on patient presentation.

But I will say we're very happy with how we've seen Defitelio growing particularly in the U.S. market of late. That coupled with reestablishing a positive Vyxeos trend, really strong start to Vyxeos in Europe, super strong Xyrem performance in the first half of the year, our team working hard to address the Erwinaze challenges, a good launch of Sunosi and the rapid progress of R&D pipeline, leaves us feeling really good about where we are going in the back half of the year. We're not done yet. We've got a lot to accomplish including staying busy on the corp dev side. So I don't want to make it sound like we can coast through the second half of the year. But I think I want to thank our employees for a great start to the year and we're looking forward to reporting our progress in the months to come.

Thank you.

Thank you. I'm showing no further questions at this time. I'll turn the call back over to Kathy for any closing remarks.

Thank you, Valerie and thank you again for joining us today. We will be participating in the upcoming Wells Fargo and Morgan Stanley Health Care Conferences and we'll also host an investor update around the World Sleep Congress and we hope to see many of you there. This will now end our call.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.