Jazz Pharmaceuticals PLC (JAZZ) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Third Quarter 2008 Jazz Pharmaceuticals Incorporated Earnings Conference Call. My name is Kamisha, and I will be your operator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Matt Fust, Chief Financial Officer. Please proceed, sir.

Thank you, Kamisha. And good morning, everyone. Welcome to Jazz Pharmaceuticals Third Quarter 2008 Financial Results Conference Call. With me today are Dr. Sam Saks, our Chief Executive Officer, and Bob Myers, our President. Following our prepared comments today, we'll be opening up the call to Q&A.

Our third quarter financial results press release was issued earlier today and is also available at our website. I'll remind you that remarks we may make on this call 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 differ. I'll ask Bob to begin today's call with an update on our commercial activities.

Good morning, everyone. Thank you for joining us today. I'll be providing updates on the progress of both of our commercial products, Xyrem and Luvox CR. I'll start first by telling you that we had another record-breaking quarter for Xyrem. Xyrem net sales end of third quarter were $14.2 million, which represents an increase of 48% compared to the third quarter of 2007.

For the first three quarters of 2008, Xyrem net sales were $38 million, a 36% increase over the first three quarters of last year. Through the third quarter, we established new weekly records for the number of Xyrem prescriptions filled and the number of weekly Xyrem shipments to patients. Our strong sales and marketing efforts are resulting in more and more narcolepsy patients receiving the important benefits from appropriate treatment with Xyrem.

For Xyrem, a significant part of our success in our commercial strategy has resulted from our targeted efforts on physician education. Our physician education programs are designed to communicate the clinical data supporting the safe and effective use of Xyrem for the treatment of excessive daytime sleepiness and cataplexy in narcolepsy patients. So far in 2008, we have conducted more than 300 of these programs to educate physicians on the diagnosis of narcolepsy and the appropriate use of Xyrem in narcolepsy patients.

As reflected in this quarter's record Xyrem sales figures, our educational programs have been highly effective in supporting the sales team's promotional efforts to its focused audience of specialty physicians. In terms of Xyrem prescriptions, sleep medicine specialists continue to be our most productive physician audience for Xyrem, followed by neurologists. In the last 12 months, more than 1,200 new physicians have enrolled in the Xyrem success program. And this is the first step for a physician toward becoming a prescriber of Xyrem.

Total marketing programs were executed during this third quarter to support our strategic objectives, including a new media campaign featuring the LPGA golfer [Nichole Dray], a narcolepsy patient whose life has been dramatically improved since she started successful Xyrem therapy. And this campaign has already produced nearly 500,000 media impressions.

Turing to Luvox CR prescriptions and ex-factory sales continue to grow since the time of launch in mid-April. Through the week ended October 31st, more than 27,000 prescriptions have been filled according to IMS weekly data reports. In October, ex-factory sales were $1.1 million, which represented a significant increase compared to sales in September.

Although we are pleased to see this trend of increasing Luvox CR prescription and ex-factory sales, this growth has fallen short of our expectations for the product. In response to this situation, we have made the difficult decision effective immediately to reduce the size of our sales force in the United States from 175 territories to 110 territories and to eliminate certain supporting commercial and administrative positions.

With this action, we are confident that we will be able to continue to grow sales of Xyrem and of Luvox CR with a significantly lower sales force expense. As you'll hear from Matt, we believe this action will help shorten the time required for our Company to reach breakeven on a cash flow basis in the coming year.

Let me now spend a few minutes updating you on the progress of the ongoing launch of Luvox CR. Our commercial team is focused on starting new OCD patients on Luvox CR, converting existing OCD patients from other therapies to Luvox CR and increasing awareness among physicians about the effectiveness of Luvox CR in the treatment of SAD. As we expected, most of the Luvox CR prescriptions during this early phase of the launch have been written for OCD patients.

Our commercial efforts continue to focus on our key messages. Luvox CR has proven efficacy in the treatment of OCD and SAD with impressive clinical results in three out of three Phase III trials. Luvox CR has a weight-neutral profile. And Luvox CR has a low incidence of sexual-adverse events in the clinical studies.

Our message, that Luvox CR is an effective and well-tolerated treatment option for patients suffering from OCD and SAD, is being well received by physicians. As we expected, the overwhelming majority, more than 70% since launch, of prescriptions are being written by our target physician audience of psychiatrists.

To allow physicians who have appropriate patients to try Luvox CR, we've distributed more than 350,000 one-week sample packs since launch. While sampling does impact the weekly IMS prescription data, we are hearing encouraging qualitative feedback for our sales team. And positive initial physician experiences with Luvox CR samples are translating into increasing numbers of Luvox CR prescriptions.

Our efforts to increase access and reimbursement for managed care for Luvox CR have been very successful. More than 80% of Luvox CR claims are commercial pay. And Luvox CR has been reviewed by managed care plans, representing 44% of insured patients. And Luvox CR is available to patients without a prior authorization for approximately 70% of insured patients.

The average co-pay for Luvox CR patients is $31, which is comparable to other branded products in this therapeutic category. In addition, for the use of our point-of-sale rebate card, patients can receive up to $25 off their co-pay amounts to fill a Luvox CR prescription. To date, point-of-sale cards have been used for approximately 14% of Luvox CR prescriptions.

As with Xyrem, a central focus for our Luvox CR marketing campaign has been disease education, directed at both physicians and patients. For example, one of our innovative programs is an online support tool for OCD patients called CT Steps. CT Steps is a self-help behavioral therapy program designed to support OCD patients to control the symptoms of their condition by providing access to cognitive behavioral therapy via the internet. Cognitive behavioral therapy has been shown to be effective in the treatment of OCD and is often used in combination with SSRI therapy.

To wrap up my comments today, we are very pleased with the continuing growth in sales and prescriptions of Xyrem with record sales in excess of $14 million in the third quarter of 2008. Sales and prescriptions of Luvox CR are growing steadily. They're clearly below our initial expectations.

As a result, effective immediately, we have reduced the size of our sales force by approximately 40%. We believe that with this new sales force size we will continue to drive the sales of our two commercial products with a much lower sales force expense. I'll now turn the call over to Sam, our CEO, to provide you with updates on progress in our development portfolio.

Thanks, Bob. I'll focus my comments today on updates on our development pipeline with a focus on two sodium oxybate franchise programs, JZP-6 and KEY-10. And I'll also mention our JZP-8 program.

In September, we reported the last patient had completed treatment in the first of two pivotal Phase III clinical trials of JZP-6, sodium oxybate for fibromyalgia. We are on track to release top line results from the first Phase III trial within the next few weeks.

To recap our clinical strategy, we are conducting two pivotal Phase III clinical studies to evaluate the efficacy of JZP-6 for the treatment of fibromyalgia. In addition, we are conducting an open-label safety and efficacy continuation study for patients who have completed either of the Phase III trials.

The primary endpoint in the US for both Phase III pivotal studies is the reduction in pain based on a pain-visual analog scale using a measure of pain relief recognized by FDA. Measurement of pain was also an endpoint in our successful Phase II trial. The second of our Phase II/Phase III trials is being conducted at clinical sites in the US and Europe.

We're working closely with our partner UCB on this trial to support European enrollment in the study. And we're very pleased with the strong working relationship with UCB. The second Phase III study has a target enrollment of 525 patients and is more than 90% enrolled. Subject to positive results from both of these studies and completion of other activities, we expect to submit and NDA in the US by the end of 2009.

Our interactions with thought leaders at the recent American College of Rheumatology Meeting here in San Francisco in October confirm that the understanding and treatment of fibromyalgia has been evolving quickly. Fibromyalgia has been under-recognized as a legitimate condition. The national disease-oriented campaigns and brand-promotion activities now being conducted by pharmaceutical companies are raising the awareness and acceptance of this disorder.

Fibromyalgia is a complex syndrome characterized by five primary symptoms; pain, disturbed sleep, fatigue, morning stiffness, and in some cases depression. Current approved therapies for fibromyalgia primarily address pain. But physicians expect the treatment of fibromyalgia will continue to require a polypharmacy approach.

Our market research also indicates that in spite of the recent treatment advances, there remains high demand among fibromyalgia patients for additional options to address symptoms beyond pain, such as sleep and fatigue. The prevalence of the disorder, the shortcomings of current treatments, and the potential therapeutic benefits of JZP-6, as were seen in our Phase II trial, give us confidence that there's significant commercial opportunity for our product following the successful outcomes of our Phase III trials and FDA approval.

On today's call, I'd like to also provide an update on a program we've not previously discussed in much detail. KEY-10 is our product development program with sodium oxybate for the treatment of essential tremor. During the third quarter, the final patient completed our Phase IIa clinical trial.

The trial was a multiple-dose, double-blind, placebo-controlled crossover study and enrolled 19 patients with moderate or severe essential tremor. The trial is designed to examine the efficacy, tolerance, pharmacokinetics and pharmocodynamics of various low-dosage regimens of sodium oxybate taken during the day. We expect to present the results from this trial in the first quarter of 2009.

Essential tremor is a common movement disorder that affects up to 14% of people 65 years and older. It is more prevalent than Parkinson's disease. Essential tremor is a neurological disorder characterized by rhythmic shaking of the hands and sometimes other parts of the body and is invoked by intentional movements. Patients with essential tremor have difficulty performing everyday tasks, such as pouring a glass of water or writing.

There is no known cure for essential tremor. Medications such as beta blockers and primidone provide some relief but often have intolerable side effects, including drowsiness, difficult concentrating, and poor balance. The condition is currently poorly managed with no cure and few treatment options to address symptoms.

Turning to JZP-8, patient enrollment is continuing in our Phase II open-label clinical trial. JZP-8 is our internasal formulation of clonazepam for the treatment of recurrent, acute, repetitive seizures in patients with epilepsy. This trial is designed to evaluate drug efficacy, safety, and pharmacokinetics. And we currently anticipate enrollment of the last subject and release of top line results in early 2009.

We are in discussions with potential development partners for our JZP-8, JZP-4, and JZP-7 programs. It is our objective to complete at least one development partnership by the end of 2008. Until partners are identified in order to efficiently manage our financial resources, we have slow development timelines and corresponding expenses for JZP-4 and JZP-7.

JZP-4 is a controlled-release formulation of an anticonvulsant and is preparing to begin Phase II clinical testing in 2009, subject to the financing from a development partner for this program. JZP-7, a novel gel formulation of ropinirole to treat restless legs syndrome, is preparing to commence a Phase III clinical trial in 2009. Earlier this year, we obtained confirmation from the US Food and Drug Administration that a single positive Phase III study may be sufficient for approval of this product.

We pride ourselves on maintaining a robust development portfolio of products that have the potential to address true patient needs. At the same time, we are committed to striking a balance between achieving clinical progress and careful management of our resources. I'd now like to turn the call over to Matt for a financial review of the quarter.

Thank you, Sam. In light of the challenges of the current financial markets, we are focused on growing product sales and on implementing strategic cost reduction measures to move Jazz Pharmaceuticals as quickly as possible to cash breakeven from operations, which we believe can occur as early as 2009. Continued growth in the sales of Xyrem and Luvox CR coupled with lower SG&A and R&D expenses are key steps toward this objective. You can see in the third quarter financial results that we released today that we are making progress, both on sales growth and on the cost structure.

We're pleased to report another quarter of strong sales growth. Total revenues for the quarter ended September 30th, 2008, were $17.7 million, led by growth in Xyrem sales to $14.2 million, as Bob described.

I'll remind you that we're continuing to apply sell-through revenue recognition for Luvox CR, which means that we recognize sales revenue based on prescription data. GAAP net sales during the third quarter measured using this sell-through approach were approximately $2 million. During the third quarter, we shipped and invoiced approximately $1.5 million of Luvox CR to wholesalers, bringing our total wholesaler shipments since launch to approximately $4.7 million.

For the third quarter of 2008, our reported gross margin on net sales was approximately 68%. Reflected in this number in the quarter, cost of product sales includes a charge of approximately $3 million related to Luvox CR inventory, which we have determined to be in excess of our forecasted needs, primarily reflecting product which we expect my expire due to dating. Excluding this charge, the combined gross margin on net sales of Xyrem, Luvox CR, and Antizol in the third quarter would've been approximately 85%, in line with our past experience.

Research and development expenses for the third quarter of 2008 were $12.2 million compared to $21.9 million in the second quarter of 2008. The lower research and development expenses in the third quarter of this year compared to the second quarter primarily reflect reduced spending on our JZP-6, JZP-8, and JZP-4 development programs and on research and development personnel. Lower R&D expense in the third quarter resulted in part from the cost reduction measures, which we implemented in June of this year to reduce R&D activities and headcount.

Selling, general, and administrative expenses for the third quarter of 2008 were $24.3 million compared to $34.1 million in the second quarter of this year. SG&A expenses were significantly higher in the second quarter compared to the third quarter primarily due to expenses related to the Luvox CR launch, which took place in the second quarter.

Let me note a few key items affecting cash. We ended the third quarter with approximately $52.9 million of cash, cash equivalents, and marketable securities. During the third quarter, we completed three transactions, which generated approximately $40 million in net cash proceeds for the Company. In July, we completed the sale of equity units, which consisted of 3.8 million shares of common stock and 1.7 million warrants, which generated net proceeds of approximately $24.5 million. This amount is reported on our September 30th, 2008, balance sheet in stockholders' equity.

Second, also in July, we completed an amendment to our license and distribution agreement with UCB in connection with the JZP-6 development program for fibromyalgia, under which UCB paid us $10 million. This payment replaces the $7.5 million milestone payment, which would've been due in 2009 upon the completion of the second JZP-6 Phase III clinical trial. We're currently accounting for this payment as deferred revenue as a current liability on our balance sheet until the completion of the second Phase III clinical trial for JZP-6, at which point we expect to recognize some or all of that $10 million amount as milestone revenue.

Third, we completed an agreement to sell to Paladin Labs the Antizol and Antizol Vet products together with our commercial inventory of those products for a cash payment of $5.8 million and potential future payments based on product sales. This transaction appears as a $3.9 million gain on the sale of product rights in our statement of operations with the gain reported net of our basis in the Antizol asset.

Subsequent to the end of the third quarter in October of 2008, we amended our Luvox CR license agreement with Solvay to change the timing for milestone payments that we owe Solvay and to better match our payment obligations with the sales ramp of Luvox CR. Prior to this amendment, we had owed Solvay a $10.5 million milestone payment on September 30th, 2008, and a second $10.5 million milestone payment on December 31st of 2008.

Under the amendment, we will make three payments of $3.5 million each during the fourth quarter of 2008. The first payment was due and paid in mid-October. The second and third payments are due in November and December. We also agreed to make nine payments, each of approximately $1.7 million, with those payments to be made monthly in January through September of 2009.

You'll recall that the expansion of our senior debt facility back in March of 2008 included a provision under which we could draw an additional $30 million of senior debt through January 31st, 2009, subject to the fulfillment of certain conditions, which included reaching a sufficient level of product sales during 2008. Because we do not now expect to reach a sufficient level of Luvox CR sales during 2008, we do not expect to draw additional funds under the senior debt facility this year.

I'll wrap up with a few updates to our financial guidance for 2008. First, based on Xyrem's strong performance through the first ten months of the year, we are reconfirming our 2008 Xyrem net sales guidance of $50 million to $55 million. We now expect Luvox CR ex-factory sales, those sales we invoice to our customers, to be in the range of $7 million to $10 million for 2008.

With regard to R&D expense, we now expect our reported R&D expense for the full year 2008 to be in the range of $70 million to $75 million. As noted earlier, we did receive a $10 million milestone payment from UCB in the third quarter. And as Sam mentioned, we are in active discussions with potential new development financing partners on our other development-stage assets.

Finally, we're further reducing our SG&A expense guidance for 2008. We now expect full-year SG&A expense to be in the range of $115 million to $120 million. That concludes our management team updates on the quarter. I thank you very much for your attention. And I'll now turn back to the operator to being the Q&A portion of the call.

(Operator Instructions) And your first question comes from the line of Rich Silver from Barclays Capital. Please proceed.

Hi. Good morning. Matt, can you hear me?

Good morning, Rich.

Yes, can you maybe provide a little bit more detail as to how you get to this cash flow positive projection? I didn't hear what -- when in '09 did you say?

Rich, let me first make one correction to one of the comments I made earlier. And then I'll address your question. With regard to the change in the Solvay milestone payments, in 2009, the payments that we will make in January through September of next year are each $1.17 million each, not $1.7 million each, as I think I said.

With regard to your question really looks at several different dimensions. First, we do expect continued sales growth for Luvox CR and for Xyrem extending into 2009. And with the strong gross margins on those products averaging between 80% and 85%, that should significantly increase our top line revenues as well as gross margin.

On the expense side, as you've seen, looking at the progression particular from second quarter to third quarter of this year, our research and development expense has ticked down meaningfully. Our current R&D spend is primarily focused on JZP-6, which, as you heard from Sam, we are now completed with the first Phase III trial and rapidly approaching complete enrollment on the second Phase III trial.

So during 2009, our expenses on JZP-6 will be wrapping up those pivotal Phase III trials, wrapping up the open-label trial, and preparing for NDA submission, which will meaningfully reduce the level of spending on JZP-6.

And beyond that, in our development pipeline, as we've mentioned, all of JZP-7, JZP-4, and JZP-8 are in active partnering discussions. And all three of those programs will only move forward into the next phase of development to the degree that we're able to secure development partners or other financing support for them. So we are expecting to meaningfully reduce our net R&D expense next year. And our gross R&D expense, if higher, would need to be supported with development partners or other financing.

And similarly, in the SG&A arena, you've seen by the actions we are taking today that we've reduced the level of SG&A expense that we're directly at our promotional activities by right-sizing our field force for the products that we currently promote. We do have capacity in the field sales force to add additional products, which is another source of either revenue or cost offset. And now that we're past the launch here on Luvox CR, the promotion expenses and marketing expenses associated with that product will be lower in 2009 than in 2008 because we have the launch behind us.

As we put those pieces together, it looks to us that heading for cash flow breakeven from operations during 2009, although we're not yet able to specify when in the year that might happen, is an achievable objective. And frankly, in this financial climate, we think it's one where we need to really position the Company to move in that direction.

Okay. So on SG&A as we back into the fourth quarter, is that a level that you think will remain steady on a go-forward basis?

So perhaps using the third quarter SG&A as a jumping-off point, that was just over $24 million for the quarter. That obviously included a full quarter of expense associated with that portion of the sales force that we have now reduced with the announcement effective today and promotional and marketing spend, particularly on Luvox CR, will also continue to track downward as we move through the launch process.

So our current expectation is that we'll see lower SG&A expense in Q4 than in Q3 on an operating basis, keeping in mind that we will have the one-time charge associated with the [riff] flow in through SG&A in the fourth quarter. And as we head into 2009, we expect SG&A will continue to trend downward.

Okay. Thank you.

(Operator Instructions) And your next question comes from the line of Gary Nachman from Leerink Swan. Please proceed.

Hi. Good morning. First, could you just comment on how has your view changed overall of peak sales of Luvox CR? And what have been the real issues with the uptake? Is it just being tagged to much as an OCD product?

Yes, this is Bob Myers. Thanks for the question, Gary. As far as the uptake of Luvox CR, one of the things that we've realized is that when we launched Luvox CR back in the middle of April that the awareness from physicians was very low, which was in part due to the fact that there was a significant gap between the completion of the Phase III trials and the actual approval by the FDA, several years. And as a result, it's taken us longer with our marketing efforts and our promotional efforts to raise the awareness about Luvox CR as an effective treatment for OCD and SAD.

In addition, we're seeing that physicians are starting Luvox CR therapy on a few patients. But they're also waiting to see the effectiveness of Luvox CR in those patients before they start additional patients on treatment. And as we know, SSRI therapy typically doesn't have effect for four weeks, eight weeks, or longer. And so we are seeing a bit longer of a lag in uptake due to that.

And I think, finally, as I mentioned, we've been sampling Luvox CR to get physicians comfortable with using the product in patients. And obviously, that providing free samples of therapy will decrease the number of prescriptions that are written on a commercial basis. So there are a number of factors which have we believe slowed the ramp of Luvox CR. But we certainly do believe that the product will continue to grow into 2009 and beyond.

Okay. So what are you thinking with respect to peak sales now that the product--and especially in light of the fact that you're pulling back on promotional efforts behind it?

Gary, I don't think we want to give any particular guidance with respect to peak sales at this time. But I want to reinforce that we do think the product has legs. We've maintained the kind of size sales force that we're comfortable has the potential to grow the product, size sales force that's not that different than some of us experienced back in the day with Concerta. So we believe that the market research we're seeing and the feedback we're getting from the field suggests that this product still is growable. But obviously, it has not met our expectations. And we recognize that. And that's why we're taking these actions.

I would also add to Bob's points about the uptake that we mentioned earlier that we expect to benefit in the future from the great amount of noise in the fibromyalgia space that's being made by others. Here, we were very glad initially to be 100% share of voice in these two disorders. And we thought that's a big advantage, which to some extent it is. But on the other hand, in terms of getting more noise around OCD and SAD, we're the only company that are focused on those disorders right now. And that means that we're carrying the full burden of awareness and appropriate treatment of these disorders.

Okay. And I think in your prepared remarks you commented that you don't think the reduced sales force will really affect Xyrem in a big way. But could you just sort of clarify that? I mean, it seems that you have definitely benefited from the bigger sales force. And that could've contributed to the strong quarter. And is it possible down the road that you could even take the sales force down further? Is there some flexibility there?

Gary, this is Bob again. Just wanted to remind you that Xyrem has been growing very well, even before we expanded our sales force. In 2006 and 2007, you'll recall that we actually had 50 people in our sales force. And sales were growing very strongly in those years.

So we believe that even with 110 sales territories, we are going to continue to see strong growth of Xyrem. There's a fairly small number of physicians that are writing prescriptions for Xyrem throughout the United States. And 110 sales territories will definitely be sufficient to call on those doctors and increase the use of Xyrem in the future. We do believe that this sales force size will continue to drive sales of Xyrem into 2009.

I would also say, Gary, that -- to reinforce what Bob said--that we're still in a position where, with 110 territories, that the average territory has far more Luvox CR targets than Xyrem targets. There's still a small number of Xyrem targets per territory. So we're not changing that.

Okay. And then is it possible that you could take down the sales force further if you need to? Or is this really the minimum level that you want to go? And for the fibromyalgia indication, what's the appropriate number to launch that? Thanks.

So right now, we believe that the 110 sales force size is the right size for Xyrem and Luvox CR. You do make a great point about fibromyalgia. Remember that we plan to submit our NDA by the end of 2009.

And one of the nice things that we're thinking about for fibromyalgia is the target audience there. There's a very small group of specialty physicians, of rheumatologists, and pain doctors that we could either call on ourselves with an expansion of our sales force or potentially partner if that is the more attractive option for us. But for right now, we do have the optimal sales force size for Xyrem and Luvox CR.

Okay. Thank you.

And, Gary, we'll make that decision on an economic basis. I mean, the good news about having the ability, given that rheumatology is a focused audience to expand to cover it, is when we think about partnering with others, it's the option of do we do it ourselves or partner? And we'll make that decision based on an economic basis.

And that concludes your questions. I would now like to turn the presentation back over to your host Mr. Matt Fust for closing remarks.

Great. Thank you, everybody, for your participation in today's call. And we'll look forward to keeping you updated, both on our development and commercial progress. I'll also remind you that we'll be making a company presentation on November 19th at the Lazard Capital Markets Healthcare Conference being held in New York City. And we look forward to seeing many of you there. Have a great day.

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