Jazz Pharmaceuticals PLC (JAZZ) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter 2007 Jazz Pharmaceuticals, Inc. Earnings Conference Call. My name is Ikea and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session toward the end of the conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jim Karrels. Please proceed, sir.

Thank you, Ikea, and good afternoon everyone. Welcome to our third 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, will provide a commercial update; and Matt Fust, our CFO, who will walk you through the financial details of the quarter. Following our prepared comments, 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, www.jazzpharmaceuticals.com. By way of a Safe Harbor Statement, let me add that the remarks 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 now turn it over to Sam Saks.

Thank you, Jim. Good afternoon, everyone and thank you for joining us today. I will start today's call by reviewing key achievements for the quarter and then turn the call over to Bob, who will provide an update on our commercial efforts.

There is a lot of enthusiasm inside the company regarding our Luvox CR launch, which is planned for the first quarter of 2008. We believe our talented commercial team will execute a successful launch. In a few minutes, Bob will walk you through some of the pre-launch activities underway for Luvox CR, including the expansion and training of our sales force.

As our commercial organization prepares for the anticipated commercial launch of Luvox CR, we have also made progress in our four clinical stage development programs this quarter. We continue to enroll subjects in both of the Phase III pivotal trials of JZP-6, our product candidate to treat fibromyalgia syndrome.

As we mentioned on our second quarter conference call, we achieved an enrollment milestone under our agreement with UCB Pharma in August. This milestone triggered a $7.5 million payment from UCB to Jazz Pharmaceuticals during the third quarter. We anticipate sharing top line data on the first of the two pivotal trials in the second half of 2008.

In September, 2007, we submitted an investigational new drug application to the FDA for JZP-8. This product candidate is a novel formulation incorporating a benzodiazepine and is being developed for the treatment of recurrent acute repetitive seizures. Jazz Pharmaceuticals' initial development work suggests that JZP-8 has the potential to provide fast-acting efficacy while addressing problems associated with the administration that has limited the use of currently available therapy.

The FDA has indicated that a future NDA filing for JZP-8, or new drug application, could be eligible to receive priority review. The company plans to initiate a Phase II clinical trial in the fourth quarter of 2007.

For JZP-4, interim data has been obtained from two single dose studies, one in healthy volunteers and one in epilepsy patients. This product candidate is a controlled release formulation of an anticonvulsant that has a similar chemical structure to Lamictal, or lamotrigine, an anti-epileptic drug marketed by GSK for the treatment of epilepsy and bipolar disorder.

The data from the two single dose studies indicate biological activity in a human epilepsy model and in epilepsy patients. A single dose study of a controlled release formulation of JZP-4 is underway and is expected to complete by the fourth quarter of 2007. And we plan to initiate Phase II clinical trial activities for JZP-4 by the end of 2007.

During the third quarter, we initiated a second pharmacokinetic study of JZP-7, a novel formulation incorporating a dopamine agonist for the treatment of restless leg syndrome. Top line results from that study are expected in the second quarter of 2008.

To summarize Jazz Pharmaceuticals' development activities for year end 2007, we expect to initiate clinical trials for two of our development programs, JZP-8 and JZP-4. In addition, our development program for restless leg syndrome continues to advance with PK data for JZP-7 expected in the second quarter of 2008. Finally, patients continue to enroll in our Phase III JZP-6 clinical trials in fibromyalgia.

We are proud that our product candidates have the potential to provide new treatment options for some difficult to treat disorders. As always, we continue to pursue and initiate new feasibility projects, both internally and through collaborations to complement our development portfolio.

And finally, I'm happy to announce that Jazz Pharmaceuticals plans to host an Investor Day in New York City during the first quarter of 2008. We plan to provide a more in-depth review of our portfolio products and product candidates as well as our commercial business, including the Luvox CR launch. And now I'll turn the call over to Bob.

Thanks, Sam. I'll start today with a quick review of sales numbers for third quarter and then spend a majority of the time providing update on Luvox CR.

In the third quarter of 2007, Xyrem net sales were $9.6 million. That represents an increase of 27% compared to the third quarter of 2006. This net sale number does include a reduction to net sales of approximately $300,000 related to a manufacturing issue with one lot of Xyrem in Europe in 2006.

Without this reduction, Xyrem net sales would have increased by 31% compared to the third quarter of last year. Xyrem sales are tracking in line with our projections and we expect full year Xyrem net sales between $38 million and $40 million in 2007.

During the third quarter, we launched a new promotional campaign for Xyrem, focusing on the diagnosis of narcolepsy and highlighting Xyrem's unique efficacy in treating the two major symptoms of the disease, excessive daytime sleepiness and cataplexy.

In addition, we are continuing to build our intellectual property position around Xyrem. In August, the U.S. Patent and Trademark Office ordered us a new patent for Xyrem and this patent hasn't listed in the FDA's Orange Book. Also in October, our partner, UCB Pharma, launched Xyrem in Italy and UCB is currently selling Xyrem in 13 countries throughout Europe.

Turning to Antizol, net sales during the third quarter of 2007 were $3.8 million, an increase of 18% compared with the third quarter of last year. As I mentioned on our second quarter conference call, we do expect to continue to see fluctuations in quarterly sales of Antizol.

I'll take some time now to discuss Luvox CR, as there has been significant activity at our company in preparation for the commercial launch of Luvox CR, which we continue to expect to occur in the first quarter of 2008. Today, I'll provide an update on four general areas related to Luvox CR approval and launch.

First an update on our regulatory status with the FDA. Second, an update on the manufacturing of launch supplies. Third, an update on our ongoing market research. And finally, an update on our sales force expansion. As a reminder, our response to the approval letter for Luvox CR was submitted to the FDA in June and the FDA PDUFA action date is December 22, which is now less than seven weeks away.

Since June, we and our partner companies have responded to various inquiries from the FDA regarding this submission. Based on these conversations, we believe that the NDA for Luvox CR is under active review at the FDA. Our efforts related to the approval of Luvox CR are in the very capable and experienced hands of our Chief Regulatory Officer Janie Whistle, who has led the process for the successful submission and approval for more than 20 pharmaceutical products during her career.

With regard to manufacturing, we have been working closely with the Elan Corporation, our manufacturing supplier for Luvox CR. We've been very pleased with the ongoing production activities at Elan. In fact, currently the manufacturing runs are underway for the first lots of Luvox CR which can be sold in the marketplace, obviously pending FDA approval.

Third, we're continuing to complete the market research to help inform the design of our marketing and promotional programs for Luvox CR. During the third quarter, we held a highly productive meeting with key opinion leaders in the treatment of obsessive compulsive disorder, or OCD, and social anxiety disorder, or SAD.

These prominent physician members of our advisory board confirmed several of the themes which will guide our marketing activities for Luvox CR including the significant need for physician education and patient education about OCD and SAD including practical diagnostic criteria, the importance of comprehensive care for OCD patients and SAD patients, and the significant value which the improved treatment option could bring to patients from these serious medical conditions.

Finally, as we mentioned on our second quarter conference call, we are expanding our sales and marketing organization. During the third quarter, we hired and trained our top two levels of sales management, our area business directors and our regional sales managers.

Since then, the sales management team has been recruiting and hiring additional specialty sales representatives. Our first wave of 15 new sales representatives completed their initial training in October. These sales representatives are now in their assigned sales territories promoting Xyrem.

We've been very impressed by the experience and talent of the sales professionals we've been able to attract to our company. These specialty sales representatives have an average of nine years of pharmaceutical selling experience with much of that time spent selling to physician specialists including psychiatrists and neurologists.

Our second wave of approximately 15 new sales representatives will attend training later in November and we expect to complete our expansion to approximately 200 field based sales personnel which does include our sales management personnel by the end of the year.

In summary, we've made considerable progress in laying the groundwork for Luvox CR and we're looking forward to a successful launch in the first quarter of 2008. I will now turn the call over to Matt to provide a financial review of the quarter.

Thank you, Bob. For the quarter ended September 30th of 2007, our total revenues were $21.5 million compared to $11.5 million in the third quarter of 2006. The increase in total revenue compared to the third quarter of last year resulted primarily from recognition of $7.5 million of contract revenue from UCB related to achievement of a clinical enrollment milestone during this third quarter in our Phase III development program for fibromyalgia syndrome, as well as from ongoing growth in the sales of Xyrem and Antizol.

Gross margin on product sales for the third quarter of 2007 was approximately 86%, compared to approximately 82% for the third quarter of last year, due to higher Xyrem unit costs in the third quarter last year.

Research and development expenses for the third quarter of 2007 were $17 million, compared to $14.7 million for the third quarter last year. The higher R&D expenses this quarter were primarily due to spending on the Phase III clinical development program for JZP-6 as well as to an increase in our R&D staff compared to last year.

As we discussed on our second quarter earnings call, the costs associated with commercial manufacturing scale up and production of some Luvox CR commercial inventory is being accounted for as R&D expense during this period prior to FDA approval. These costs were approximately $1.8 million during the third quarter of 2007 and approximately $3.8 million for the first three quarters of 2007.

For the full year 2007, we have reduced our estimates of the expense related to manufacturing scale up and to the production of initial commercial quantities of Luvox CR to a total of $8 million to $10 million, lower than the range that we provided on our second quarter conference call.

Our reported R&D expense of $17 million for the third quarter of 2007 has been reduced by $1.25 million, as a result of reaching an agreement during the third quarter under which we will receive a payment from a former product development partner in connection with a project that was terminated in 2005.

Our selling, general and administrative expenses for the third quarter of 2007 were $18.1 million compared to $12.9 million for the third quarter ended September 30, 2006. This increase was primarily due to spending in preparation for the Luvox CR launch, to increased head counts and to higher expenses to support our sales force, offset in part by lower legal fees.

The net loss for the third quarter of 2007 was $19.4 million, compared to a net income of $7.7 million for the third quarter of 2006. Net income in the third quarter last year included $31.6 million of gain on the extinguishment of a development financing obligation in connection with a terminated development program.

Finally, net cash used in operating activities was $15.4 million during the third quarter of 2007, resulting in an unrestricted cash, cash equivalents and marketable securities balance as of September 30, 2007 of just $130.9 million.

That concludes our management team updates on the quarter. Thank you all for your attention and we'll now turn the call back to the operator to begin the question and answer portion of the call.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Rich Silver of Lehman Brothers. Please proceed.

Good afternoon. First question is on the market research that you've recently completed. Can you give us some sense of how the findings from this market research might have compared to earlier market research that you've done, conclusions being either more positive, more negative.

You mentioned that education would obviously be a big part of the effort and I think that's something I would assume you would have expected before. But just generally any kind of nuances on the margin between this research what you've done and what you've done in the past. And also how you would compare this effort in terms of the sample size, et cetera.

Thanks, Rich. I'll ask Bob Myers to respond to that.

Hi, Rich.

Hi, Bob.

I think the findings that we had with this revised report were very consistent with our impression going into the advisory board meeting. The advisors did really influence the need for education for OCD and SAD which has not been done very well in the past by pharmaceutical companies and did stress the importance of both pharmacotherapy and behavioral therapy as very effective ways to treat these patients and both of those findings were consistent with what we thought about the market previously and are going to help shape the way that we address the market going forward.

We would say, Rich, that from a medical standpoint, that the one thing that we heard loud and clear was increasing focus on higher doses of treatments in this area and that's something that we're taking into account in our approach to the disorder.

Okay. And, Matt, you had mentioned a figure of $8 million to $10 million. I'm sorry, what were you referring to on the R&D side, and what that compared to in terms of the number that you provided on last quarter's call?

Sure. So the specific topic at hand is as we run the commercial scale up activities for the Luvox CR and begin to produce the inventory that will be the initial commercial quantities, we're required, under U.S. GAAP to account for those expenses as R&D expenses until the point that the product is approved for marketing.

Our current estimate is that the full year 2007, that set of costs, which will run through the R&D line, is in the range of $8 million to $10 million. We'd indicated on our second quarter call a higher range of $10 million to $13 million.

Okay.

I actually wanted to break out that level of detail for you so you could understand the ongoing R&D expense as opposed to the one time costs that are flowing through related to Luvox CR.

Okay. Thanks.

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

Thank you. Just given the risk of (inaudible) FDA and the last couple of examples of rejections in the same division that will be reviewing Luvox CR, the [Cipranox], which, of course, is a schizophrenic drug, and most recently, a Glaxo drug, that just got a rejection which is -- I'm going to mispronounce it and embarrass myself -- but anyway, just wondering, and that was for major depressive disorder, ER, extended release version, if you could sort of contrast these examples with your confidence in Luvox CR getting approval. Thanks.

Well I would just say the one key -- or a couple of key differences. One is, remember that the two examples you just gave are new chemical entities to the United States market in terms of trying to introduce something that would change therapy.

Here we have a controlled release formulation where we already have an approvable letter, so we already have feedback. So the nature of the beast is different going in, and remember that we already have an approvable letter in our hands. In the case of the anti-psychotic, that was given a non-approvable and, as you know, the ER formulation was also given a non-approvable letter as well.

So you can't pronounce it either?

I would call it [Jeparone], but I'm not -

All right. Thank you.

And your next question comes from the line of Marc Goodman of Credit Suisse. Please proceed.

Yes, I was just hoping you could talk about the fibromyalgia market and how it's evolved since we've got some new products and new data out there and what we've learned.

Well, we've been watching the Lyrica numbers build. It's a little tough to evaluate in the sense that we know people are using a lot of Lyrica off label as they're using Cymbalta off label prior to registration because the products are otherwise available for other conditions, so it's a little bit hard to understand the full impact and it's very early in the launch.

We know they initially led with a disease oriented campaign and now have focused on the drug. And one thing we have seen in the prescription data is increasing prescriptions for the Lyrica by psychiatrists, which may indicate fibromyalgia use.

Then I guess the only other question I would just have as far as new products that you haven't talked about. Are you putting money toward some proof of concept studies that, potentially, next quarter you might mention some new products? Just give us an idea of kind of where you are on -

We have a range of feasibility projects which we always intend to have because we assume that a lot of them fail. So we always have, at any one time, a number of feasibility projects. They have prospectively identified hurdles and the idea is that we'll tell you more about them when they clear some additional hurdle of risk.

But you can expect more color on those projects obviously as they do such and we may even delve a little bit into that area in February, although we don't have the final script for February completely worked out, so -- but our general approach will be to give you more information as they move into so called full development, but absolutely we have a range of feasibility projects.

Thanks.

And your next question comes from the line of Corey Davis of Netaxis. Please proceed.

Thanks very much. Back to the market research. Did I hear you correctly that the KOL said that there's a need for better education with more practical diagnostic criteria, and if that's the case, how do you actually change the diagnostic criteria for OCD?

I think generally what people are referring to is getting that in front of people that have useable tools that can be developed that can aid in the diagnosis and referral of these patients. I think one thing we heard from the KOLs is that these are unique anxiety disorders that have unique issues and need to be treated in different ways than things like general anxiety disorder, which you may be more familiar with, and part of the challenge is to make the docs who are referring into the psychiatrists aware of these important differences and the need for these patients to be treated differently and have additional types of therapy beyond just pharmaceutical therapy.

And we are obviously going to be behind new improving therapy for the condition as a whole. We hope that we'll be part of that approach, but by no means is pharmaceuticals the only approach to these anxiety disorders.

So the criteria is all there, it's just not really publicized as much as it should be?

It's just trying to put it in a user friendly way in front of the people who need to better understand it and utilize it more.

Got it. And the milestone payment that you got from UCB for enrollment. Can you be more specific with exactly what that was for? Was that for completion of enrollment?

There was an enrollment trigger built into our initial arrangement with UCB in the deal that we struck back in 2006. Basically it was designed to provide some support for the development program along the way in addition to the up front payment that we received.

Okay. So it doesn't mean that enrollment's done?

Correct

And then with regards to JZP-4 and the release you talked about. An indication of "biological activity." Sam, can you maybe expand on -- a little bit more what that means? What type of activity?

Sure. And, again, we would hope to discuss this in more detail in February. But basically, both in healthy volunteers, where you create a stimulus to the CNS that mimics a seizure in healthy volunteers and you see ability to increase the threshold at which that occurs in the dose-related fashion. And then in epilepsy patients of a particular kind of epilepsy that's inducible, where you can induce it and look at the ability of your drug to prevent it.

Both of these models have been used with commercially available anti-epileptics during their development or post-development and so these models are somewhat validated in that things that are in the commercial marketplace work - generally work in these models. So it's an important piece of data for us.

And am I right in assuming that those first two studies were done with an immediate release formulation and now you're using a controlled release in this next study?

That's correct.

And is there a clinical advantage to that reformulation or is it simply just going from like a BID to a QD.

We believe that it's necessary for several different reasons that we believe controlled release therapy is optimal for this particular drug substance and for this particular marketplace in general. We could do certain things with the immediate release drug substance while we were working on the controlled release that were valuable in our development program, but of course, post pharmokinetic studies that we've discussed we intend to focus our development efforts on the controlled release dosage form. We do not intend to commercialize the immediate release.

And the controlled release is a once a day?

Yes.

I think that's all I had. Thanks.

(OPERATOR INSTRUCTIONS).

Ikea, this is Jim Karrels. I think if there are no other questions, I'll quickly wrap up. Thank you, everyone, for your participation in today's call and we look forward to keeping you updated on our future development and commercial progress.

Looking ahead to our investor conference schedule, we will next be presenting at the 2007 Annual Credit Suisse Health Care Conference in Phoenix next week, November 14th, and we hope to see many of you there. Have a great evening, everyone.

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

Thank you.

You're welcome.