Jazz Pharmaceuticals PLC (JAZZ) 2010 Q3 法說會逐字稿

Good afternoon. My name is Lamida and I will be your conference operator for today. Jazz Pharmaceuticals Third Quarter 2010 Earnings Conference Call. This call is being recorded. 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 Ami Knoefler, Executive Director, Investor Relations and Corporate Communication of Jazz Pharmaceutical. Please proceed.

Welcome to the Jazz Pharmaceuticals third quarter results conference call. Our financial results were reported in a press release issued earlier today and available on our corporate website. With me today are Bruce Cozadd, CEO, Bob Myers, President, and Kate Falberg, CFO. Following some brief comments on quarter we will open the call to your questions.

As a reminder, remarks we make on this call about future expectations, plans and prospects for Jazz Pharmaceuticals constitute forward-looking statement with the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to our financial performance and growth potential, 2010 financial guidance and 2011 outlook, future product sales and expenses, price increases, our JZP-6 product candidate, regulatory matters, product development, corporate development activities, sodium oxybate supply and sufficiency of our cash resources.

Statements we make on this call that are not statements of historical fact may be deemed to be forward-looking statements that involve numerous risks and uncertainties that could cause our actual results to differ significantly from those projected, including without limitation risks and uncertainties detailed in our SEC filings, including under the heading Risk Factors. Our SEC filings and reports are available on our website. We plan to file our Form 10-Q for the three months ended September 30, 2010 with the SEC shortly.

Now it is my pleasure to turn the call over to Bruce Cozadd, our CEO.

Good afternoon, everyone and welcome to our third quarter update. As we near completion of our first full year of profitability it is a real pleasure to report our third quarter financial results and update our full year 2010 financial guidance.

Our commercial team has continued to deliver strong growth with net sales through the third quarter of 2010 that are 51% higher compared to the first nine months of 2009. Xyrem sales have achieved a new record of $37.2 million for the quarter with notable volume growth of 8% over the third quarter of 2009.

This strong sales performance, combined with lower than anticipated operating expenses and reduced interest expense has resulted in significantly higher third quarter earnings. We also announced in today's press release a large increase in our bottom-line guidance for the year from a prior range of $1.05 to $1.15 to a new range of $1.45 to $1.50 in adjusted net income per share, highlighting the earnings power of our business.

At the same time we continue to plan for and evaluate new growth opportunities starting with appropriate investments in our current pipeline. As anticipated we have scheduled a meeting with the FDA to clarify their recent response regarding our JZP-6 NDA in fibromyalgia. We look forward to obtaining FDA's input to inform our next steps with the program. We are continuing activities on our solid oral dosage forms of sodium oxybate and our JZP-8 candidate for recurrent acute repetitive seizures in epilepsy patients.

As we look towards 2011 on the heels of what has been so far a pivotal year for Jazz Pharmaceuticals, we maintain our commitment to growth, and revenue, and profits and delivering strong returns for our stockholders, while pursuing corporate development opportunities that will enable us to leverage our commercial platform, diversify our portfolio and fulfill our mission of helping patients. Now let me turn the call over to Bob for a commercial perspective on the quarter and comments about our ongoing sales and marketing activities.

Thanks, Bruce, and good afternoon, everyone. The third quarter was a truly impressive quarter for us on the commercial front, driven by the success of our sales team with both of our currently marketed products, Xyrem and Luvox CR.

In the quarter we delivered strong year-over-year growth of 46% in total net product sales. With regard to Xyrem, sales in the third quarter set a new record of $37.2 million during a quarter with no price increase.

The third quarter was our best quarter ever in terms of Xyrem prescriptions, Xyrem bottle shipments and Xyrem sales. I would like to highlight the quarter Xyrem volume increases that we have seen throughout this year. During 2010 we have seen improving year-over-year Xyrem volume growth in each quarter, a 5% increase in the first quarter of 2010 compared to the first quarter of 2009, followed by 6% growth in the second quarter and now in the third quarter we delivered a volume increase of 8% compared to the third quarter of 2009.

We also saw our best quarter in 2010 for Xyrem new prescriptions in the third quarter. This sustained volume growth clearly demonstrates Xyrem's important clinical benefits for narcolepsy patients.

Today we are also announcing price increases for both of our products that were effective on November 1. For Xyrem we implemented a price increase of 22% and for Luvox CR the price increase was approximately 10%. These price increases are consistent with our prior price increases and going forward we continue to believe that we have significant pricing flexibility for our products, particularly for Xyrem.

As you recall, we have a coupon program for patients for both Xyrem and for Luvox CR which helps patients to maintain low, monthly out-of-pocket costs. Effective November 1, we made two major enhancements to our patient coupon program for Xyrem. First, under our prior coupon program were responsible for the first $100 of monthly out-of-pocket costs. As of November 1, Xyrem patients are now responsible for the first $75 of monthly out-of-pocket costs.

Second, we have increased the maximum monthly coupon amount by 50% under our new program. As of November 1, Xyrem patients can receive up to a maximum monthly coupon of $1,200. Historically, we have seen that the impact of our Xyrem coupon program results in approximately 95% of our patients having monthly out-of-pocket costs of $100 or less. We expect this trend to continue or possibly to improve with these latest changes in the Xyrem coupon program. These changes and our overall coupon programs are a reflection of our Company's commitment to helping patients.

With regard to supply of sodium oxybate, the active ingredient in Xyrem, we have continued to make progress on our ongoing activities to change suppliers from Lonza to Siegfried. Siegfried has successfully obtained registration from the DEA to manufacture sodium oxybate, and importantly Siegfried has also been granted quota for sodium oxybate. We are working closely with Siegfried that we have an uninterrupted supply of sodium oxybate and that Siegfried is qualified as our new supplier.

In addition, Lonza has recently manufactured additional sodium oxybate for us, consistent with our agreement with Lonza for a supply of sodium oxybate through the end of 2011. We now believe that the quantity of sodium oxybate we have on hand should be sufficient to meet our Xyrem commercial needs and clinical needs for 2011, as we work to transition to Siegfried.

So, wrapping up on some key points about Xyrem, the third quarter was a terrific quarter with record numbers of the Xyrem prescriptions and record sales. Given these trends, along with the price increase effective on November 1, we clearly see the potential for continued strong increases in Xyrem sales going forward.

I would also like to briefly comment on Luvox CR. Our commercial team's efforts contributed to a significant increase in Luvox CR net sales in the third quarter of 2010. Sales of Luvox CR in the third quarter rose to $6.6 million, representing an increase of 33% over the third quarter of 2009. This growth of Luvox CR sales was due to a combination of increases in both price and prescription volume.

Reflecting on the quarter, I would like to add that we are extremely proud and appreciative of our sales and marketing team and their commitment to the growing success of our current products. Throughout the year our teams have demonstrated tremendous focus and enthusiasm. We are definitely seeing the impact of their efforts and talent in our sales results so far this year and we have confidence that their strong efforts will continue to drive our commercial performance in the future.

With that, I will now turn the call over to Kate for a summary of our third quarter financial results and our updated guidance for 2010.

Thanks, Bob, and good afternoon, everyone. For the third quarter total net sales were $43.8 million, an increase of 46% over Q3 2009 and a sequential increase of 11%. For the year we now expect total net sales to be in the range of $164 million to $168 million, reflecting an increase in Xyrem sales guidance to a range of $140 million to $142 million.

Consistent with our guidance for the year, total gross margin on product sales was 93% for the third quarter of 2010, compared to 92% for the same period last year. The increase in margin was primarily driven by the impact of price increases on both products.

R&D expense in the third quarter was $7.3 million or 17% of sales, compared to $7.6 million or 25% of sales in the same period last year. R&D expense for the third quarter of 2010 includes costs related to our work on potential solid oral dosage forms of sodium oxybate, as well as regulatory activities in connection with the JZP-6 NDA.

Also, as you know, a significant portion of our R&D expense is associated with ongoing regulatory and safety monitoring activities in support of our current commercial products. For the year we now expect R&D expense to be in the range of $27 million to $28 million, which is lower than our prior guidance range.

SG&A in the third quarter of 2010 was $18 million or 41% of sales, compared to $15 million or 50% of sales during the same quarter of 2009. The increase in SG&A was primarily due to higher personnel costs, including stock-based compensation and activities related to JZP-6.

For the year, we now expect SG&A expenses to be in the range of $69 million to $71 million. This is lower than our prior guidance as we have decided to delay some previously planned activities related to JZP-6.

Interest expense in the third quarter was $1.2 million versus $4.7 million last quarter and $5.4 million in Q3 2009. In the first half of this year we reduced our senior debt outstanding by almost 60% and reduced the interest rate on the remaining debt by more than 60%. We expect our interest expense to decrease further as we make quarterly principal payments and reduce our leverage ratio, which will lower the spread over LIBOR under the terms of our loan agreement.

We continue to recognize the benefit of our net operating loss carry forwards, which totaled approximately $369 million as we entered 2010. We do not expect to have any tax provision for this year.

Turning to the bottom line, we are reporting a profitable quarter on both a GAAP and an adjusted basis. Our GAAP net income for the third quarter was $13.2 million or $0.32 per diluted share. Non-GAAP adjusted net income, as defined and reconciled to GAAP in our press release, was $17.2 million or $0.41 per diluted share for the third quarter of 2010. This is compared to $2.1 million or $0.06 per diluted share for the same period of 2009.

We have now reported three quarters this year with sequentially growing adjusted EPS and our revised adjusted EPS guidance for the full year of $1.45 to $1.50 per share points to our expectation of continuing that sequential growth in the fourth quarter.

For those of you who are modeling 2011 Xyrem sales by quarter, please keep in mind that for the past two years we have experienced a modest sequential volume decline from the fourth quarter to the first quarter. We believe this is largely due to payers making annual plan adjustments at the beginning of the year.

Regarding our outlook for the full year of 2011, we expect that growing product sales, combined with appropriate investments in R&D and ongoing expense management should continue to drive attractive earnings growth.

Now I will turn the call back to the operator to take your questions.

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

Hey, good afternoon. Just on the operating expenses, can you -- you are not providing 2011 guidance and obviously there is still some important moving parts with regard to what the FDA is going to say on JZP-6 and what you do with that, but assuming that there isn't any further work on JZP-6, should we assume that the, essentially the backed in R&D and SG&A figures for the fourth quarter are what we should expect going forward? Or should we assume that there will be some pickup in the development activities of JZP-8, and therefore some kind of increase, at least on R&D?

So, Rich, as you point out we are not yet giving 2011 guidance in general or at the operating expense level. On the R&D line there are a lot of moving pieces. A part of our R&D is in support of our existing commercial operations. That will continue here, continuing development of the oral solid dosage forms for sodium oxybate and the JZP-8 program.

And it remains to be seen what, if anything, we would be doing on JZP-6 until we get more feedback from FDA, as we described. So I would say it is not safe to extrapolate from fourth quarter guidance into next year. It is a little too early to tell.

On the SG&A side, I think we do have a better sense of that, but I would point out that something that will be different for 2011 versus 2010 is that we may be in a position of expending some resources to defend our intellectual property position around Xyrem, giving the recent ANDA filings, so there could be some expense associated with that that we didn't see for at least most of this year. And there may be opportunities to invest a little bit more on the commercial side to continue driving the strong sales performance that we have seen contribute to a nice bottom line performance of the Company this year.

And on JZP-8, can you share with us what your current development plan is in the next year?

So we have been saying pretty consistently this year that we think we will be a in a position in the early part of next year to provide an update on JZP-8. We continue to feel it could fulfill an important unmet medical need for these patients by providing an attractive outpatient option. You know we have done some Phase II work historically and how we choose to move that program forward next year will be something we will be looking forward to updating you on as we move into next year.

Okay. Thank you.

And your next question comes from the line of Bill Tanner from Lazard Capital. Please proceed, sir.

Thanks for taking the question. Thanks for -- or congrats on your quarter. Bob, a couple of questions for you, just wondering and I know the Company doesn't typically comment on the timing or pricing or the magnitude thereof, but just trying to understand a little bit about the kind of algorithm that you guys might use in terms of determining what the pricing would be I guess. I usually think about something like quality adjusted life years relative to the standard of care, which I guess there really isn't one. So without really getting into I guess the specifics of the magnitude, just kind of interested in understanding a little bit what is the thought process.

Sure, Bill. So one of the things that I think it is important to start with is that Xyrem does for narcolepsy patients what no other product does. It is the only product approved by FDA to treat the two major symptoms that are suffered by narcolepsy patients, so you can't get the impact of Xyrem from any other product.

Second, obviously narcolepsy is an orphan condition, relatively few patients throughout the United States. And as we look at our pricing relative to other orphan drugs, we are actually on the low end of orphan pricing. Many orphan drugs can go at an annual cost in excess of $100,000 per year and certainly those drugs get more scrutiny from payers and managed care plans as you increase the cost.

And we always consider patient access to our drugs when we think about our pricing strategy. I will point out that even at our highest dose of our approved label today after the price increase the annual cost for 12 prescriptions per month is still only $35,000 per year.

So, yes, there is a price ceiling that we want to stay below to not raise the scrutiny of payers or plans, but quite frankly we are nowhere that ceiling right now. We could more than double our current price and still be below that ceiling.

We do want to avoid big jumps in price, abrupt changes in price, which can have a negative impact on payers, physicians and, most importantly, patients. So that is sort of our current approach to pricing. We always think about patient access and making sure that we don't discourage patients from getting on therapy. The coupon program, I will point out, does help patients get low monthly out-of-pocket cost and that is a program that we are definitely committed to.

And, Bob, just on that, that was going to be my next question is on the coupon program. Is the impetus for it to soften the blow potentially of higher prices, or is it also something to I guess entice new patients to take the drug? Because as we have done some checks in the field with physicians who do prescribe it, they like it a lot and they would also suggest that the Company hasn't been overly active in even promoting it on label.

Well, Bill, I will stick to your comment on the coupon programs. We do think that it is a good opportunity for patients to reduce their out-of-pocket costs if for whatever reason they have -- they are cash pay or co-insurance. 80% of our patients have an out-of-pocket cost of $50 or less. 95% of our patients have out-of-pocket costs of $100 or less.

The maximum coupon amount that we announced today does help those cash pay patients. On the low end we do see some patient preference obviously and willingness to take Xyrem therapy at a lower price point, $75 versus $100. In this economy I think people are looking very carefully at all the out-of-pocket costs they are having, so we want to do both, look at the lower end of patients and see if there was a difference between $100 and $75 in getting new patients and maintaining current patients, as well as providing some relief on the high end.

And then maybe just the last question, Bruce, you actually did mention it about not being prepared for guidance of the -- I am assuming that the Company would be providing guidance at J.P. Morgan in January. Is that, likely the convention?

I will actually let Kate take that one.

So, Bill, we haven't decided yet. It will be early next year, either at the conference or maybe with our fourth quarter earnings.

Okay, great. Congrats on a great quarter. Thanks.

Thanks, Bill.

And your question comes from the line of Gregg Gilbert from BofA Merrill Lynch. Please proceed, sir.

Thanks. Hi guys. Two questions, one is a simple one. What portion of 22% actually flows through the -- to net price increase for the Company, all things considered? And secondly is sort of a curiosity. Where would a generic filer have been able to purchase the product to be able to run biostudies? Thanks.

So, Gregg, I will take the first question there. Important to remember that that full 22% does not flow through the bottom line. The coupon program that we announced today will affect our gross to net, so you should, if you are modeling and thinking through the impact of that price increase, you should think about taking a lower net amount of a price increase. With regard --

Yes. That is what I was thinking. Are you able to provide any granularity around that, or not?

We really haven't been providing the Company's financial contribution to the coupon program. Going forward we will consider calling that out. At this point we have not.

Okay.

And I think, Gregg, just going by past price increases and looking at what we have seen, if you sort of deconvolute the volume increases we have announced and the price increases we have announced, you see the vast majority of the price increase come through. We haven't given an exact percentage, but most of it comes through.

And then on your second question, which is where would an ANDA filer have sourced other material for any necessary studies. Unfortunately, that is not information we have, so we can't answer that question.

Okay. Thanks.

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

Thanks. You kind of addressed this already and I really don't mean for it to be a softball question, but do you worry about growth next year just getting too high? Things are going so great on the top-line. Unless you really ramp the spending you are going to have a tough time looking out in '12 and '13 repeating that kind of growth. And so how are you managing the Company knowing full well that you can't make any decisions before you know the future of fibro?

And that was a softball question, Corey.

You saw right through me.

I think the most important thing for us as we think about providing good returns to our shareholders is in fact continuing to make the right investment and growing the top-line. That is obviously where the earnings growth comes from.

And we hope we will be successful in continuing to show significant and sustained growth across these two products that have been driving out earnings. When it comes to the expense side I think our job is to deliver earnings growth and to make wise investments of that money in good programs, whether that is supporting our commercial operations or moving forward new products that we think could be significant contributors to earnings growth going forward.

And really that is the only way we think about expenses. We don't think about how do we throw more expenses into new earnings growth. I can honestly tell you nobody here spends any time thinking about that.

Okay. Of the 8% volume growth, do you have a sense whether or not that is mostly coming from new patients or increased dosing or -- compliance is the one thing that I am thinking about. Do you have a sense as to whether or not patients are just taking more doses as a result of the coupons, et cetera?

So, Corey, this is Bob. We have seen increases in our refill rates. Whether that is due to our nursing program, which is a very good program in terms of contacting patients when they initiate therapy, whether that is due to the coupon program, that is a great question. We are looking at that very carefully.

The average dose that we have seen for patients has been maintained at approximately 7.5 grams. That has really not changed throughout the year, so that is not really contributing to the volume growth.

Okay. That's all I have. Great quarter.

Thank you, Corey.

(Operator Instructions). And your next question comes from the line of Difei Yang from CapStone Investments. Please proceed, sir.

Thank you. Thank you for taking my question, a quick question with regards to the manufacturing side. It looks like we still have a one year or about 15 months for the manufacturing transition to take place. Do you have any visibility with regards to whether Siegfried will be able to ready ahead of the end of 2011?

So, this is Bob Myers. We are working closely with Siegfried. As you heard today, Siegfried has cleared two very important hurdles, both registration for their site for manufacturing sodium oxybate, as well as getting DEA quota. There are obviously some steps between here and getting full FDA approval and we are working very close with Siegfried and we do expect that we will get Siegfried qualified as our new supplier in the second half of next year.

Okay, thank you. And the follow-up question to that, in the case, say in the case if there is a delay, will you be able to build up inventory of Xyrem?

So it is a great question because we have announced that Lonza, our current supplier has terminated our agreement. They have actually sold the facility that they are currently manufacturing, that site. The purchaser of that site has -- we are discussions with them to whether or not they would be willing to manufacture for us. We really can't comment beyond that, but we do potentially have a source of supply at that same facility under the new owner.

Thank you.

And you have a follow-up question from Bill Tanner from Lazard Capital. Please proceed.

Thanks for the follow-up. Bob, just on wondering if -- and I know you guys have talked in the past that maybe perhaps less than 10% of the Xyrem prescriptions one would guess could be written for patients as a treatment for fibromyalgia. Just curious if you are seeing any change in the trend there and if you have any visibility as to if the Company decides not to advance JZP-6, if you would contemplate those changing, understanding of course that it is being used off label, as it is anyway.

Yes. So, Bill, remember that we don't know exactly when a Xyrem prescription comes into our centralized pharmacy whether the doctor is writing that for narcolepsy or for some other indication. We do know the specialty of the physician who is writing the prescription and the vast majority of our prescriptions are coming from our target audience.

Right now rheumatologists, who you might think would be a group of doctors who write it for fibromyalgia, are 1% of our volume and that has stayed flat throughout 2010. I also want to emphasize that we -- our Company has a very comprehensive compliance program from our sales force and we don't call on any doctors that are not seeing narcolepsy patients, so we are not really seeing any -- we are not actively promoting for any off label use. We are -- and not at all, but we really haven't seen any increase in the number of rheumatologists or pain doctors who are writing for JZP-6 or Xyrem.

Okay. Thank you.

(Operator Instructions). Okay. There is no question at this time. I will now like to turn the call over to Ms. Ami Knoefler for closing remarks. Please proceed.

Great. Thank you for joining our call this afternoon. As a reminder, you can please contact the Company's Investor Relations department should you have any follow-up questions for our management team. And I would also like to remind you that we will be presenting at the Lazard and Barclays Investor Conferences later this month and we also look forward to participating in the annual JPMorgan Healthcare Conference in January. Thank you and have a good day.

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