Jazz Pharmaceuticals PLC (JAZZ) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Jazz Pharmaceuticals, Inc. earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode.

Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Kate Falberg, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you, Jennifer, and good afternoon, everyone. Welcome to our fourth quarter 2009 conference call. This is my first earnings call since joining the Company as CFO in December, and I am pleased to kick-off today's call and introduce the participants.

With me today are Bruce Cozadd, Chairman and CEO; and Bob Myers, President. After I provide the details of our results, Bob will be sharing updates on our commercial activities and 2010 sales and gross margin guidance, including increases to the sales guidance announced earlier this year during our presentation at the JPMorgan Healthcare Conference.

Bruce will then wrap up with comments regarding the state of our business overall and the remainder of our financial guidance for 2010. Following our prepared comments, we'll open up the call for questions.

As a reminder, remarks that we make today 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 including but not limited to statements related to Jazz Pharmaceuticals' financial performance and growth potential including 2010 financial guidance and the sufficiency of Jazz Pharmaceuticals' cash resources, statements related to Jazz Pharmaceuticals' JZP-6 product candidate, including future regulatory matters and the potential commercialization of JZP-6, and statements related to future product development.

Any statements we may make today on this call that are not statements of historical fact may be deemed to be forward-looking statements.

Forward-looking statements involve risks and uncertainties that could cause Jazz Pharmaceuticals' actual results to differ significantly from those projected, including without limitation those risks and uncertainties detailed in Jazz Pharmaceuticals' filings with the Securities and Exchange Commission including under the heading "Risk Factors" in its registration statement on Form S1 filed by Jazz Pharmaceuticals with the SEC on December 23, 2009.

Our fourth quarter and full year 2009 financial results were reported in a press release issued earlier today. We plan to file our Form 10-K for the year ended December 31, 2009 with the SEC tomorrow. These documents will also be available on our corporate website.

Now moving on to the results. We ended 2009 with a solidly profitable quarter driven by record sales and tight expense management. Total product sales were $37.3 million in the fourth quarter, an increase of 100% over the fourth quarter of 2008, and 24% over the third quarter of 2009.

Total product sales for the full year of 2009 were $115.1 million, for an increase of 93% over the prior year. We are pleased to report that our total product sales for 2009 exceeded the upper end of the guidance we provided in our last quarterly conference call on November 5, 2009. Total revenues were $38 million for the fourth quarter, up 107% over the fourth quarter of 2008.

For the full year, total revenues were $128 million, up 112% over the full year of 2008. As a reminder, revenues in 2009 included a $10 million milestone from UCB related to JZP-6, which was received in 2008, but recorded as revenue in the second quarter of 2009 when the last patient completed our second JZP-6 Phase III clinical trial.

Total operating expenses were $26.9 million for the fourth quarter and $112.5 million for the full year 2009. Total operating expenses in the fourth quarter were substantially lower than the fourth quarter a year ago due to reduced clinical trial activities as our Phase III trials for JZP-6 were completed, lower marketing and promotional expenses for LUVOX CR, and a lower number of employees in 2009 compared to 2008.

As a reminder, the fourth quarter of 2008 had a one-time charge related to LUVOX CR of $29.8 million, which occurred in the fourth quarter of 2008. R&D expenses were $6.3 million in the fourth quarter and $36.6 million for the full year. As anticipated, R&D expenses in the second half of 2009 decreased significantly compared to the first half of 2009 due to the completion of our second Phase III clinical trial of JZP-6 for fibromyalgia.

SG&A expenses were $15.7 million for the fourth quarter and $58.7 million for the full year of 2009. These represent reductions of 22% from the fourth quarter of 2008 and 47% from the full year of 2008. As I mentioned earlier, these decreases in 2009 relative to 2008 were primarily due to our having fewer employees in 2009 and lower marketing and promotional expenses for LUVOX CR which was launched in 2008.

GAAP net income for the fourth quarter of 2009 was $5.6 million, or $0.17 per share which compares favorably to a loss of $56.9 million, or $2.04 per share in the fourth quarter of 2008. For the full year of 2009, we recorded a loss of $6.8 million, or $0.23 per share compared to a $184.3 million loss for the full year of 2008.

Beginning with our release today, we are providing a non-GAAP measure of earnings per share which excludes certain items that impact our income statement.

Specifically, our non-GAAP adjusted EPS figure backs out amortization of intangibles which are primarily related to their original acquisitions of XYREM and LUVOX CR, non-cash interest expense, which is related to debt issuance costs and the warrants issued in connection with our senior secured debt, stock-based compensation, and contract revenues which are due to the amortization of milestones received from UCB in prior periods.

In the fourth quarter of 2009, our non-GAAP adjusted earnings per share was $0.33 and for the full year 2009 the non-GAAP adjusted net loss per share was $0.05. We encourage you to look at the table reconciling our GAAP net income or loss in earnings per share to the related non-GAAP adjusted figures provided in our press release issued earlier today, which is available on our website at www.jazzpharmaceuticals.com under the Investors tab.

As of December 31, we had $15.6 million in unrestricted cash and we believe we'll have sufficient cash and cash flows to operate the business and meet all of our obligations during the upcoming year. I will now turn the call over to Bob Myers, our President, to provide you with updates on our commercial products, XYREM and LUVOX CR.

Thank you, Kate. And good afternoon, everyone. Thank you for joining our call today.

Today I am very happy to report that the fourth quarter of 2009 was once again characterized by our continued strong commercial performance by our sales and marketing team. In the fourth quarter, we achieved record quarterly net sales of $37.3 million and for the full year 2009 we delivered net sales of $115.1 million.

In the fourth quarter, our team continued to deliver significant growth in XYREM sales and prescriptions. Fourth quarter XYREM net sales were $31.6 million which represented an increase of 26% compared to net sales of $25 million in the third quarter of 2009 and is double the level of net sales recorded in the fourth quarter of 2008.

For the fourth quarter of 2009, we also established new records in terms of the number of XYREM prescriptions and number of XYREM bottles shipped to patients. In the fourth quarter of 2009, we grew our XYREM bottle volume by 8% compared to the fourth quarter of 2008.

Full year 2009 XYREM sales were $96.8 million, which represents an increase of 80% compared to sales of $53.8 million for the full year 2008. For XYREM, in 2010, our sales and marketing efforts will be focused on expanding the use of XYREM among our current prescribers for narcolepsy patients.

Excessive daytime sleepiness, or EDS, is a hallmark symptom and the most prevalent symptom among patients with narcolepsy. Currently there are diagnosed narcolepsy patients with EDS who are being treated with stimulants alone. Our sales and marketing efforts this year will recommend that physicians continue their regular evaluation of narcolepsy symptoms in their patients to determine if some of these patients can benefit from including XYREM treatment in their current regimen.

I'm pleased to report that our dedicated nursing program is continuing to have a positive impact. And as a reminder, our nursing program provides new XYREM patients with nursing contact along with education and support during their initial weeks and months of XYREM therapy. We have seen that patients participating in the nursing program are more likely to continue on XYREM therapy, and we are proud to provide this important service at no cost to our patients.

XYREM continues to be the only products approved by the FDA to treat both of the two major systems suffered by narcolepsy patients, EDS and cataplexy. XYREM continues to be recommended as standard of care for the treatment of narcolepsy by the American Academy of Sleep Medicine.

Shifting now to LUVOX CR, we reported another quarter of steady sequential sales growth primarily driven by increases in prescriptions. As reported by IMS, prescriptions in the fourth quarter were consistently more than 2,300 per week. In the fourth quarter, net sales of LUVOX CR were $5.7 million, representing 15% growth sequentially over the prior quarter.

Full year 2009 LUVOX CR sales were $18.3 million, which represents an increase of 220% compared to sales of $5.7 million in 2008. In 2010, we will focus on continuing to grow the number of LUVOX CR prescriptions by focusing our messaging of physicians who currently prescribe LUVOX CR for OCD and/or SAD, our two FDA approved indications.

Our objective is to move LUVOX CR up in the treatment paradigm so that LUVOX CR is a first drug prescribed for newly diagnosed patients, for our approved indications, and the first drug chosen after a treatment failure in patients in our approved indications.

In terms of managed care coverage for our products, our health systems team has been very successful over the past year in obtaining payer coverage for both XYREM and LUVOX CR. Both of our products continue to receive a favorable formulary placement and reimbursement.

In addition to achieving record sales and volumes for both of our products, our manufacturing and supply chain teams are working close with our vendors and suppliers to carefully manage our cost of goods sold to maintain and improve our gross margins. Our cost of goods sold was $2.8 million for the fourth quarter and $9.6 million for the full year 2009.

As a result, in the fourth quarter our gross margin improved to 93% compared to 92% in the third quarter. For the full year 2009, our gross margin was 92%. So based on our strong performance last year in 2009, I'm pleased to announce today that we are now increasing our 2010 sales guidance to a range of $148 million to $158 million which represents year-over-year sales growth of 29% to 37%.

For the first time, we are also providing 2010 sales guidance for our individual products. For 2010, we expect XYREM sales to be in the range of $124 million to $130 million, providing year-over-year growth in a range of 28% to 34%.

For 2010, we expect LUVOX CR sales to be in the range of $24 million to $28 million or a growth rate of 31% to 53%. We also expect our gross margins to remain above 90% in 2010.

To wrap up my comments today, we are pleased to report yet another quarter of record sales for both of our products and to increase our guidance for 2010 sales. These record sales levels translate into our products helping a record number of patients. Our sales force of 110 specialty sales representatives is successfully reaching the appropriate physicians, resulting in prescription growth for both of our products in their approved indications.

In 2010, we will continue our Company's mission to help improve patients' lives. I will now turn the call over to Bruce Cozadd, our Chairman and CEO.

Thanks, Bob, and good afternoon, everyone. 2009 was truly a pivotal year for Jazz Pharmaceuticals, demonstrating the extraordinary commitment and dedication of our employees to achieve steady growth and performance in our commercial business and significant progress in our clinical and regulatory activities, all while operating under a remarkable fiscal constraints.

As a result of the hard work and perseverance of all of our employees, we are able to report today on two products that posted record sales throughout the year, profitability in the fourth quarter, and the submission in December of an NDA for JZP-6, or sodium oxybate, for the treatment of fibromyalgia. As an update, the FDA has filed our NDA for JZP-6 with a PDUFA target date of October 11, 2010 to complete its review based on a standard 10-month review under the Prescription Drug User Fee Act.

As we have discussed, sodium oxybate contributes significant value to our business, as demonstrated by our strong XYREM sales and commitment to seeking approval of JZP-6 for fibromyalgia. We continue to innovate with sodium oxybate through clinical development formulation and distribution. To that end, we are pleased to announce the issuance of a U.S. patent based on the method of distributing sodium oxybate under control of a central pharmacy.

This patent expires in 2024, and is now listed in the FDA Orange Book along with two formulation patents that expire in 2020. As you may recall, we initially issued 2010 financial guidance in January and are now updating it. A few moments ago, Bob provided our guidance for sales and gross margins.

On the cost side, our R&D efforts in 2010 will be primarily focused on prosecuting the NDA for JZP-6 with the FDA, preparing for a potential advisory committee meeting later this year, and developing a new oral tablet forms of sodium oxybate. We expect R&D expenses to be lower than 2009 and to range from $25 million to $35 million.

SG&A expenses are expected to increase in 2010 compared to 2009 to a range of $65 million to $75 million as we begin our commercial preparations for a potential launch of JZP-6 for fibromyalgia in early 2011, and selectively add capabilities to bolster our ongoing programs.

Based on our expectations for continued growth in sales and continued sound expense management, we are raising our guidance for 2010 non-GAAP adjusted EPS by $0.05 per share to a range of $0.80 to $0.95 while we expect GAAP EPS to be in a range of $0.27 to $0.41. This reconciliation is also provided in our press release.

With that, we will conclude our management team update and turn the call over to the operator to begin the Q&A portion of today's call.

(Operator Instructions) And your first question comes from the line of Corey Davis from Jefferies & Company. Please proceed.

Thanks. I just had a couple of housekeeping questions first. If, Kate, or Bruce, either one, if you want to give us an update on the state of your NOLs, and if you figured out which -- how much you can use based upon your shareholder turnover, et cetera?

Sure. Corey, the NOLs as of the end of the year, the federal and state balance was $369 million, and we do have -- we are confident that there has been no -- nothing impacting our ability to use those.

Okay, great. Next question, maybe for Bob, you mentioned the 8% growth in vials of XYREM. Are you noticing an increase in dose per patient or do you think that 8% is due mostly to additional patients coming on?

Thanks, Corey. We are seeing the majority of that due to more patients being on XYREM therapy. Over time we are seeing a very slight increase in the average dose per patient for narcolepsy.

As you know, the approved dose is between 4.5 grams per night and 9 grams per night and our average dose right now is about 7.5 grams per night. That has been creeping up fairly slowly over time as patients get better efficacy at the higher doses. But the majority of that increase is due to having more patients on therapy.

Okay. And last question for Bruce. If we are all listening to the same call a year from now, what do you think are going to be the primary issues that you are discussing and what are going to be the big questions that we are going to be asking you?

Great question, Corey. I wish you had given a little heads-up so I could think about that first. I think a couple things. I think some of it will be the same as this year -- continued commercial performance of our business, how are sales growing, what are we seeing as key trends?

I think what are we doing with the R&D pipeline, beyond the sodium oxybate franchise. But a big new piece will be where are we with fibromyalgia. And our hope is a year from now we are talking about launch of a product. As you know, we are very excited about the fibromyalgia market as it exists today, a growing under satisfied market.

And we think there is definitely room for a new agent in the treatment of fibromyalgia that offers relief of the symptoms that are truly troubling these patients, certainly pain, but also sleep disorders, fatigue, and the other things that we and others have looked at in clinical trials and that investigators tell us they are the most concerned about.

Great. And nice work on that new patent. I think that will be particularly troublesome for some generics trying to get in if they ever do.

Thanks, Corey.

Your next question comes from the line of Gary Nachman from Leerink Swann. Please proceed.

Hi, good afternoon. Bruce, first sticking on the fibromyalgia opportunity, are you still planning on adding about 50 reps to launch that indication to rheumatologists, and what's the status -- are you considering looking for a primary care partner, and is all that sort of factored into the SG&A guidance?

So let me take the last part of that question and then turn it over to Bob for the rest of the answer. Our SG&A guidance for 2010 is our best current estimate of what we will spend this year including, as I said, some preparation for launch.

And we have assumed some growth and expenses, as I mentioned relating to that effort. So 2010 guidance is meant to encompass that. Let me turn it over to Bob for thoughts on commercialization of the product.

So, Gary, this is Bob. You are right in assuming that given the very concentrated doctor group that is writing prescriptions for fibromyalgia, that we are confident that we can handle the specialty audience with our own sales force. As you know, we have 110 sales territories as we speak today, and it is fair to assume that we are going to expand that when we get ready to launch JZP-6.

Probably 50 reps is not a bad assumption. We have not finalized that number. It might be a bit more than that, it might be a bit less than that. But that's in the ballpark for our expansion to really handle the rheumatology pain doctors as well as neurologists that prescribe and write for fibromyalgia.

The interesting question is primary care, and we are currently evaluating the best strategy to target those physicians. We have not made a final decision. We are considering having partners for that opportunity. And we will have more news throughout 2010 as we proceed.

Okay. And then on the R&D spend in 2010, you sort of described what that is going to go for for the most part, but what's the status of looking for potential partnerships for the other pipeline programs that have been put on hold? And are any of those actually going to move forward in 2010 without a partnership? Is that factored at all into the guidance for this year?

So -- so most of the R&D expenses as we described, are going toward a prosecution of the JZP-6 NDA, finishing up that program's last development efforts before it hopefully becomes a commercial product. And as we talked about developing new dosage forms to improve upon the current liquid formulation that is given twice nightly.

We do intend over time to expand our R&D efforts to other programs. That could include one or more of our other three programs. But as you know, our primary emphasis on those programs, at least for the last six to nine months has been on finding a partner. Let me turn it over to Bob to describe that.

So, Gary, the three projects that we have under development, JZP-4, JZP-7 and JZP-8, last year was a challenging year for us in terms of seeking partners. We have restarted those partnering efforts on those opportunities and evaluating, as Bruce said, our portfolio strategy, which of these we will proceed ourselves, but also which ones we will look to partner. And we are completing a portfolio review during the first half of 2010, and we will have more information for you later.

Okay. Bob, were there any other price increases taken on XYREM since the last one that you mentioned?

No. We announced the price increase in the fourth quarter. We did not take any price increases in the fourth quarter of 2009. That was the only one.

Okay. And from your comments earlier, it sounds like you really haven't seen any real pushback from formularies on that? Nothing has really changed from before you took the price increases?

We're continuing to see very good coverage and very low and consistent co-pays. Prior authorizations are the norm in the pharmaceutical business. We do have prior authorizations that do occur, but we have very few denials. And denial rates have been consistently low through 2008-2009, so we have not seen any new trends in terms of pushback for managed care.

Okay. And then last question for Kate, could you sort of review the schedule of debt paydown through 2011? I don't think anything has changed there, but just remind us what that is and what the expected cash flow generation will be in 2010, based on the guidance? Thanks.

Sure. We have $28 million of scheduled amortization in 2010. And the payments are $3 million this quarter and then %6 million next quarter, $9 million in the third quarter, and $10 million at the end of the year.

Then there is a $12 million payment at the end of March 2011, and the balance of $79.5 million is due in June 2011. Our guidance for adjusted EPS is $0.80 to $0.95 per share. Our press release puts that in dollar terms at $27 million to $32 million. So that's a good approximation, we think, of cash flow expectation for the year.

Okay. So, yes, it sounds like it could be a little tight in 2010, but you also have $15 million in cash right now on the balance sheet. So based on the guidance, you should be fine.

That's right.

Okay. All right, thanks. Great.

(Operator Instructions) Your next question comes from the line of Rich Silver from Barclays Capital. Please proceed.

Good afternoon. Bob, the 8% year-over-year growth in bottles shipped, how does that compare to the third quarter? I don't know if you actually provided that with the third quarter call.

We did not, Rich, thanks for the question. We did not actually announce that. This was really the first time. We've been getting the question about volume growth in our business given the price increases that we took over the last 12 to 15 months.

This is a practice that we are going to continue to have is announcing our volume growth. But we did not -- you are right. We did not disclose the volume growth in the third quarter.

And you get -- at least give us a sense directionally whether it was higher or lower than the third quarter on a year-over-year growth basis?

Yes, Rich, this is a product that has been on the market for seven years now. So, and, any typical product lifecycle you can imagine that growth slows over time. So it has been slowing. The full year 2009 growth over full year 2008 growth was 10%.

So you can average that out by quarter. But that's still double-digit growth for a product that has been on the market now for seven years. That's pretty remarkable that it is still growing at that rate given the fact that this has been approved for EDS and cataplexy since late 2005. So we are very pleased with the fact that our sales force is working closely with physicians to identify narcolepsy patients and continuing to grow our business.

And then on the R&D range, can you give us a sense of what -- I mean I know you identified some of the activities, but what would push it sort of to the higher end, and what would push it to the lower end of that range?

Yes, Rich. It's a fairly wide range. Certainly on a percentage basis it's a very wide range.

The reason it's so wide is that we are a), early in the year, and b), that there are multiple programs comprising that number. And we leave open the possibility that those programs will proceed very successfully, which implies moving faster, more broadly, and spending more.

It also leaves open the possibility that we might choose to prioritize one program over another and cut back expenses on one or move more slowly. So it's really -- it's a wide range today just because we are early in the year and we have to make assumptions about potential success and failure scenarios across programs.

And there is no factoring in of partnerships at either end of the range, is that correct?

That's correct.

Okay. And then the decision on JZP-6 as far as partnering for the PCP market, what besides perhaps the approval -- is there anything else that would be driving that decision? Is it actually something that you might consider before you receive the approval or is it something only after?

Rich, this is Bob. We are probably most likely going to be seeking a partner as we get closer to that PDUFA date. And as a reminder, that's in October.

So if everything goes well, an early 2011 launch and whether or not we have a partner on board, I think there is one strategy to maximize the opportunity to have a partner on board at launch. Another strategy is to launch to the specialty audience, make sure that specialty physicians understand the product, and then three or six months later bring on your primary care partner.

So those are the two sort of strategies that we are evaluating. And as we go through the year, we will decide the best approach for JZP-6.

Okay. And then just on the sequential trajectory of SG&A, fourth quarter of 2009 is that a good run rate for the first part of the year or would be starting at a lower level or just give us some sense of how we should think about sequential change in SG&A?

So I am going to answer out of both sides of my mouth on that one, Rich. The first is we are not giving quarterly guidance, so let me just say that but, as we said, a lot of the reason for growth of 2010 over 2009 is preparing for a potential launch of JZP-6 in early 2011.

You can imagine that those expenses are likely to increase over the course of the year rather than all come into place on January 1.

And the gross margin, can you give us some sense of whether this quarter is sort of a good base or not?

Rich, our guidance for 2010 is that our gross margins will continue to be greater than 90%. We are already at 92% for 2009, so we are already seeing some very excellent gross margins. Pretty small room for improvement there.

So the likelihood that it would on a quarterly basis actually decline is nil? Next to nil? I mean, it's not like we'd see in --

It's not nil, Rich, just given the fact that our cost of goods is a relatively small number right now relative to our net sales number. A hiccup in manufacturing, a failed lot, more shipments to our international partner where that's a lower margin than our own sales, can all perturb that on a quarterly basis. So we are trying to be conservative by saying about 90% without arguing what it will be in any one quarter.

Okay. You provided cash flow numbers. Just if you wouldn't mind, cash and marketable securities, a number by the end of the year?

No, that's not something that we're providing. Sorry.

Okay.

But I think that we've given pretty good information with our adjusted EPS guidance and the moving parts on our balance sheet are pretty easy to figure out, I think, with the debt payment.

And then one last one. The oral, or new tablet forms of XYREM, sodium oxybate, when might that begin? And what do you think as far as a timeframe for actually having a product that could be filed with the FDA?

Rich, we have been intentionally silent on that for some time. There is obviously, we believe, room for improvement in formulation here, and something that patients might prefer for multiple reasons. And so we are anxious to get a product to market at the right time.

But we've got work to finish on our end and there are lots of moving pieces here in terms of the overall sodium oxybate franchise and how we manage that over time. And we don't particularly want to let any potential competitors know what to shoot for, but we will optimize that franchise for our shareholders.

Okay. Thank you.

Ladies and gentlemen, there are no more questions at this time, and I would now turn the call over to Kate Falberg, Senior Vice President and Chief Financial Officer, for closing remarks. Please proceed.

Thank you, Jennifer, and everyone for joining us today. We look forward to keeping you up to date on our progress in 2010 and to seeing you at the upcoming Barclays Capital Global Healthcare Conference in March and the Deutsche Bank Healthcare Conference in May. Have a good evening, everyone. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.