Jazz Pharmaceuticals PLC (JAZZ) 2007 Q2 法說會逐字稿

Good morning. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the Jazz Pharmaceuticals Second Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I would now like to turn the call over to Mr. Jim Karrels, Executive Director, Finance of Jazz Pharmaceuticals. Sir, you may begin your conference.

Thank you very much, John. Good afternoon, everyone. Welcome to our second quarter 2007 financial results conference call. On the call with me today is Dr. Sam Saks, our CEO, who will discuss recent company achievements, Bob Myers, our President, who will provide a commercial update, and Matt Fust, our CFO, will walk through financial details of the quarter. Following our prepared statements, we will open up the call to Q&A.

By now you may have seen the earnings release that we issued this afternoon. This release is also available on our website, which is www.jazzpharmaceuticals.com. By way of a Safe Harbor Statement, let me add that various remarks that we may make about future expectations, plans and prospects for Jazz Pharmaceuticals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and our actual results may be different. With that, let me turn it over to Sam.

Thank you, Jim. Good afternoon, everyone. We're very pleased to be here today for Jazz Pharmaceuticals' first conference call as a public company. Before diving into the business of the quarter, I'd like to thank all of you for your interest in the company and for joining us today.

As a newly public company, we're off to a great start with much to report on in the short time since completing our IPO in early June, I'm proud to say we've accomplished quite a bit on several fronts. In the second quarter, we had record Xyrem sales and our commercial business continues to grow. As we rapidly approach our planned launch of Luvox CR, we believe our established commercial team and capabilities with an expanded sales force will help ensure a successful product launch. In a few minutes, Bob will walk you through some of the pre-launch activities underway for Luvox CR.

On the development side, we announced last week that the FDA had accepted for review the complete response by Solvay Pharmaceuticals to the FDA approvable letter for Luvox CR. The PDUFA action date is now set for December 22, 2007, and of note, I'd like to remind you that no new clinical studies were requested by the FDA as part of this submission. As we indicated in our S-1, we are targeting a first quarter 2008 Luvox CR launch subject to FDA approval of the NDA.

We continue to enroll subjects in both of the Phase III pivotal trials of JZP-6 for fibromyalgia syndrome, a serious and chronic condition with few treatment options affecting approximately 2% to 4% of the people in the U.S. In early August, we achieved an enrollment milestone under our agreement with UCB Pharma. This milestone triggers a $7.5 million payment from UCB to Jazz Pharmaceuticals.

We also recently completed a pharmacokinetic study of JZP-2, a product candidate for the acute treatment of panic attacks associated with panic disorder. Based upon the initial analysis of the pharmacokinetic data generated by the study, we currently expect to discontinue development of this formulation. While we are disappointed with this result, the decision is a good case study for how we expect to cultivate our pipeline and our overall portfolio management process.

Consistent with our aggressive risk management development process, we expect to initiate more early stage projects that will progress into later stage development. If a product candidate does not successfully meet our internal criteria at any stage of development, we will terminate the project to ensure we deploy our resources well. We want to make efficient decisions to advance and fund product candidates and opportunities with the strongest evidence backing their potential success.

We also continue to initiate new feasibility projects that may advance into late stage products in line with our mission to provide important new products for patients with neurological and psychiatric disorders. We will provide you with additional information on specific projects as key milestones are achieved.

And now I'll turn the call over to Bob, who will provide a commercial update.

Thank you, Sam. As you've just heard, our commercial business continues to grow and perform very well. Starting with sales. During the quarter, we achieved record sales of our two marketed products, Xyrem and Antizol. Xyrem net sales in the second quarter of 2007 were $9.6 million, which represent an increase of 34% compared to the second quarter of 2006 and an increase of $1 million compared to the first quarter of 2007.

During the second quarter of 2007, Antizol net sales reached $4 million, an increase of 33% compared to the second quarter of 2006 and an increase of $1.4 million compared to the first quarter of 2007. We do expect to continue to see fluctuations in quarterly sales of Antizol and we caution you not to annualize this quarterly sales amount to extrapolate for the full year. Having said that, we are quite pleased with the strong performance of Antizol in the second quarter.

Moving on to some positive international news for Xyrem. You will recall that we licensed the rights to Xyrem in 54 countries outside of the United States to UCB Pharma. And we also licensed the rights in Canada to Valeant Pharmaceuticals. To date, UCB has launched Xyrem in 12 countries throughout Europe. In addition, at the end of July, Valeant announced that it had launched Xyrem in Canada. We're very pleased that Xyrem is reaching more and more narcolepsy patients around the world.

Looking ahead, we continue to be enthusiastic about the commercial potential of Luvox CR, our next major product opportunity. Subject to final FDA approval, we are continuing to prepare for a successful launch of Luvox CR during the first quarter of 2008. [Vandeate] Luvox CR is seeking marketing approval for two serious psychiatry conditions, obsessive compulsive disorder, or OCD, and social anxiety disorder, or SAD.

These two disease states are chronic conditions which affect millions of individuals in the United States. These are not orphan drug conditions. Due to the severity and nature of these conditions, the vast majority of prescriptions are written by psychiatrists. We believe that we can reach this highly concentrated group of physicians with a targeted, experienced specialty sales force.

We are currently expanding our top notch sales and marketing organization to maximize this commercial opportunity for our company. On the sales front, in preparation for the launch of Luvox CR, we intend to expand our existing sales force from 55 individuals to approximately 200 individuals, including sales management, by the end of this year. I can tell you that we have been very impressed by the high caliber and talent of the sales management professionals that we have been able to attract to our company. We continue to make progress in creating a very seasoned sales management team with proven track records in selling value-added products to specialty physician audiences.

From a marketing perspective, we continue to complete market research to analyze the commercial opportunity for Luvox CR and further validate our assumptions. We have been encouraged with the outcome of this market research and continue to believe that Luvox CR will provide a once daily extended release value-added medication to these patients suffering OCD or SAD.

I'd like to just take a moment to summarize the Luvox CR brand opportunity for Jazz Pharmaceuticals. First, OCD and SAD represent market opportunities with large patient populations, measured in millions of patients. Second, a highly concentrated group of psychiatrists treating these patients should enable us to promote Luvox CR upon FDA approval with a very efficient and talented sales force. Finally, we believe that the competitive landscape for a successful launch of Luvox CR is attractive in that there are currently very few promoted and branded products approved by the FDA to treat these conditions.

To wrap up on the commercial update, our first quarter as a public company was a very positive quarter. Sales of our products reached all time highs and our plans for a successful launch of Luvox CR in the first quarter of 2008 are proceeding exactly as we'd hoped and as we expected.

I'll now turn the call over to Matt to provide a financial review of the quarter.

Thanks, Bob. We're happy to report, as you heard from Bob, strong revenue growth in our first quarter as a public company. For the quarter ended June 30, 2007, our total revenues were $14.3 million, which is a 29% increase over the second quarter of last year, and for the full first half of 2007, our total revenue was $28.4 million, which is up 36% over the same period last year.

The gross margin on our product sales for the second quarter of 2007 was approximately 88%, compared to approximately 83% for the second quarter last year. For the first half of 2007, our gross margin on product sales was approximately 85%, similar to a gross margin of approximately 84% for the first half last year.

Our research and development expenses for the second quarter of 2007 were $17.4 million which compares to $14.3 million for the second quarter of last year. The higher level of R&D expenses this quarter were primarily due to spending on our Phase III clinical program for JZP-6, our research program for fibromyalgia syndrome, as well as an increase in our R&D headcount compared to last year.

In addition, during the second quarter, we incurred approximately $1.6 million of expenses in connection with the scale up of commercial manufacturing for Luvox CR. During the full year 2007, we expect to incur $10 to $13 million of expense that relates to the manufacturing scale up for Luvox CR as well as the production of initial commercial launch quantities of Luvox CR in anticipation of a launch in the first quarter next year. These amounts will be reported in 2007 as R&D expense since Luvox CR is not yet approved for marketing.

Our selling, general and administrative expense for the second quarter was $18.2 million which compares to $13.7 million for the quarter ended June 30 of last year. Higher SG&A expenses were primarily due to spending in preparation for the Luvox CR launch, increased headcounts in those groups and higher expenses to support our sales force, offset in part by lower legal fees in 2007.

We booked in the second quarter a $17.5 million expense and an associated liability. This amount represents the net present value of the previously disclosed settlement we entered into with the U.S. Department of Justice and other federal agencies as announced on July 13. Under the terms of the settlement, a series of payments totaling approximately $20 million will be made to the government through 2012. A $1 million was made in July of 2007 and the next payment, which is $1.5 million, is due in early 2008.

Beginning in the third quarter of 2007, we will be recording in each period the non-cash interest expense that accounts for the difference between the $17.5 million net present value and the total amount of the payments that we'll be making.

Our net loss for the second quarter of 2007 was $39.9 million compared to a net loss of $24.1 million for the second quarter last year. Two amounts that you should note in our second quarter 2007 results are the $17.5 million expense amount that I just mentioned and a $4.9 million item recorded in Other Income which reflects the accounting treatment of a decrease in the value of our preferred stock warrant liability.

Wrapping up comments on the financial results, our unrestricted cash and cash equivalents balance as of June 30, 2007 was $148 million. During the quarter ended June 30, our net cash used in operating activities was $16.7 million and for the first half of 2007, net cash used in operating activities was $37.7 million.

That concludes the management team updates. We very much appreciate your attention and will now open up the phone line for questions. Operator, could you please poll for questions?

Thank you.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Corey Davis with Netaxis. Please proceed.

Thanks. Good afternoon guys. A couple of questions. First, how soon after the Luvox CR final approval do you think you can actually be out the door and launched?

Hi, Corey. Thanks for calling in. I think I'll look to Bob Myers to respond to that.

As you've noticed in our press release, the PDUFA date is at the end of this year. We are currently still giving our guidance that we'll be launching Luvox CR in the first quarter of 2008.

And how much lead time do you need to hire the reps? Is say, 90 days enough to get them on board or do you kind of cut it closer to the actual launch?

We are currently hiring our sales management teams as we speak and would expect that we'll be hiring the sales representatives in the fourth quarter of 2007 in preparation to have a very successful launch of Luvox CR and have a team on the ground prior to launch of the product.

Okay, and the gross margin in the quarter looked nice and high. Is it sustainable at that level, Matt?

No, I wanted to cull out the first half as distinct from just the second quarter exactly in response to that trend. There will be some bounciness in our gross margin from quarter to quarter. I think we feel comfortable that we've seen over the last several quarters, consistent gross margin of 80% to 85%, the second quarter number probably unusually high, especially compared to the second quarter of last year.

Okay. And then lastly, it sounds like JZP-2 is going to be discontinued, but I'm assuming that we shouldn't read into anything that happened there in terms of the technology that could be translated to all the other products that you have in development, is there?

No, we accessed technology on a one-off basis for that particular product and I would say that although you're correct that we're not pleased by the data we have in hand, we still see the unmet medical need here as significant and if we found another opportunity with a different technology to address that unmet medical need, we might start a subsequent project. It would just be called something else.

And I presume it just didn't get in fast enough. Is it something different than that?

Essentially that was the challenge for the product was to get the drug in rapidly. So correct, we're not happy with the speed of onset of the blood levels.

Okay, great. Thanks.

Your next question comes from the line of Marc Goodman with Credit Suisse. Please proceed.

Yes. I was wondering if you could give us an update on a couple of the other products that you hadn't mentioned yet. And second of all, just on the fibro market, can you talk about anything that you've learned since Pfizer has gotten that indication and they're kind of out the door talking a little bit. And have you learned anything more about that market?

Hi, Marc. Thanks for calling in. We are today only providing updates, if you meant the development pipeline products on JZP-2 and the JZP-6 enrollment information. I think our practice going forward will be, as we hit milestone events on those programs, to provide more detail. And I think I'll turn to Bob Myers to offer some thoughts on the fibro market.

Yes. Thanks, Marc. This is Bob. The fibro market is certainly evolving now as you saw the first approval of a medication to treat fibromyalgia with Pfizer's Lyrica. And right now the market is really evolving and I'd hate to make any conclusions on the dynamics of the marketplace. Obviously there are other companies that are also going after the fibromyalgia market. So we're going to be monitoring the situation going forward. We continue to be pleased with our enrollment in JZP-6 and do believe that it will provide a very meaningful value-added product to treat fibromyalgia.

I will also comment that we are pleased to see that a big element of what Pfizer is doing currently is to promote the disorder and to get patients with the disorder to see their doctor in a non-branded way which I think is good for everybody.

Would you talk to the experts who are helping you out? Are they getting detailed by Pfizer right now in a good way? Does it feel like it's a good - they're doing a good job?

It probably wouldn't be appropriate for us to comment on the promotional activities of others, especially what we're hearing from our consultants, but suffice it to say that again, as we've said before, we're very happy that big pharmaceutical companies are out in front of us making the case for new treatments in the disorder and getting patients to see their doctor. We obviously believe we have a unique mechanism of action and we're awaiting our Phase III clinical data.

Okay, thanks.

Your next question comes from the line of Jami Rubin with Morgan Stanley. Please proceed.

Thank you. Just a couple of questions. Firstly, on JZP-8, according to my notes, you're expected to commence a Phase II trial during the fourth quarter of this year. Is that pending an additional or any pharmacokinetic studies yet to be concluded? And my other question relates to just sort of in general, JZP-3 and JZP-2 have both now died. And I'm just wondering if there are any big picture lessons to be learned here about the company's unique approach to de-risking or if you think these issues are totally isolated and just unfortunately the luck of the draw here.

Hi, Jami. Thanks for joining us. I think I'll turn both of those over to Sam.

Yes, with respect to the two failures you mentioned, I would say that they were unrelated from a technology or clinical standpoint. JZP-3 was a little bit later stage failure than we'd like to see that's of historical nature. It's a program that's been over for some period of time. The JZP-2 result we're talking about today is more typical of what we expect to see in our pipeline which is that things fail relatively early and relatively cheaply if they can't jump over the value-added hurdles that we've set up.

So I think you can expect to hear about new feasibility projects making their way to the JZP stage over time. You can also expect that earlier stage programs will fail but our expectation with our de-risking process is that when things go into late development, the probability of Phase-3 success is high.

And can you follow up on JZP-8 if there's any other studies that need to be completed before you move into Phase II or are you at the point now where you're comfortable moving into Phase II?

No, we're at a point where we're comfortable moving into Phase II and to make a reinforced point that was mentioned earlier, we have publicly disclosed timeframes for certain events in our product pipeline from our S-1 and if we get at any point a view that we're not going to hit any of those particular milestones on any of the products, we will update you.

So one should not construe from our lack of information on the other projects that there's any issue. Our intention and our precedent moving forward is to update you when a project becomes a JZP project, when a JZP project hits an important milestone or when it is removed from the pipeline and that's our approach today.

Okay. Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Rick Silver with Lehman Brothers. Please proceed.

Yes, first of all, JZP-7 mentioned that there'd be an additional PK study. Can you provide us with that timetable again, even if it means that you're confirming that it's still the same timetable.

All I would tell you is that we have particular disclosures about JZP-7 and we're on track to hit the timelines that we've already laid out. We won't provide additional color in between here and there. Again, our precedent and the way we like to disclose things moving forward is to talk about important milestones and if we again get a clear idea that we won't be able to hit them, to let the street know.

And then in terms of projects moving from feasibility JZP level, clearly one of the positive parts of the story is that you do have multiple shots on goal. Is there a targeted number of projects that you would like to have at any given point in time such that if there was a project that was dropped that within a short period of time there might be another project to essentially replace that one?

Well, as you can understand, we always have to be loading the top of the funnel. Since we have a process that de-risks things and removes things when they fail our criteria, we always have to be starting a larger number of feasibility projects than we expect to take into late stage development. We don't think of it as a number of projects but we think of it in terms of a dollar spend in our budget process.

We have a dollar figure that's devoted to the feasibility stage and we expect that that will cover a variety of activities to generate new feasibility projects that will ensure that we're always loading the top of the funnel but we try not to get too much detail or discussion going, particularly obviously outside the company, about anything that relates to that stage because that's a stage where, again, we're spending even less time and less money and we only want to concentrate on things that meet that hurdle and get the full JZP designation. I would also say that also includes our PLE projects which are our line extension projects as well.

And a couple more. The $7.5 million milestone for JZP-6. How is that being accounted for?

That will be recorded as deferred revenue and amortized over, I believe, we're amortizing over the life of the agreement which is a long time.

That's how many years?

I think it's out through 2000 and teens. It's basically - the agreement with UCB is triggered to terminate upon the expiration of various patents and their [often] drug exclusivity in Europe. I don't recall offhand the length of the amortization but it's quite long.

And mentioned in the SG&A commentary, the increase in expenses offset by a reduction in legal fees. What would that reduction in legal fees have been?

You'll recall that in the spring of 2006 we began the work in cooperating with the government investigation of Xyrem promotion. We first learned of that investigation in the spring of 2006 and began incurring legal expenses. In the spring of 2007, that investigation process was winding down, resulting in the settlement that we announced last month. So our spending in last year was higher than the same quarter this year.

Okay. Thank you.

Well, great. Thanks everyone. This is Jim Karrels. Thanks for joining us today and we look forward to keeping you updated on our development and commercial progress going forward. Looking ahead to our investor conference schedule this fall, we will be presenting at the Netaxis Bleichroeder Hidden Gems Conference in New York on October 8 and we hope to see many of you there.

Thanks again for your participation and have a great evening, everyone. Goodbye.

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