Jazz Pharmaceuticals PLC (JAZZ) 2010 Q4 法說會逐字稿

Welcome to the Jazz Pharmaceuticals conference call to review 2010 financial results and provide 2011 guidance. Following some prepared remarks, we will open the call to questions.

(Operator Instructions).

I will now turn the call over to Ami Knoefler, Head of Investor Relations and Corporate Communications at Jazz Pharmaceuticals.

Welcome to the Jazz Pharmaceuticals business update conference call to review 2010 financial results and provide 2011 guidance. Our fourth quarter and full year 2010 results and a summary of financial guidance were reported in a press release issued earlier today. The release is available on our Company website. The format for today's call will include some opening remarks from Bruce Cozadd, Chairman and CEO, and Kate Falberg, CFO. We'll then open up the call for your questions.Joining us for the Q&A portion will be Russ Cox, SVP of Sales and Marketing.

Remarks we 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, including statements related to our financial performance and position, growth potential and guidance, and about our products and product candidates. These forward-looking statements 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-K for the year-ended December 31, 2010, with the SEC shortly.

Now, let me turn the call over to Bruce Cozadd, Chairman and CEO for opening remarks.

Thank you, Ami. Good afternoon, everyone, and thanks for joining our call today. Our fourth quarter and full year 2010 results speak for themselves. Strong financial performance throughout the year and significant progress across our business. From restructuring our balance sheet to reduce interest expense and improve our capital structure, to growing sales of our lead products Xyrem by 47% over 2009, and advancing JZP-8, our intranasal Clonazepam product candidate for acute repetitive seizures in epilepsy. Importantly, we also ended the year with a cash balance that exceeded our long-term debt.

We've seen excellent top line growth, ending the year with total product sales of $170 million, up 48% over 2009. We've also begun to demonstrate the earnings potential of our business with a significant increase in profits and cash flow during the year. When we initially provided our 2010 outlook early last year, our expected range for adjusted EPS was less than $1.00 per diluted share. Today, we're reporting our full year adjusted earnings for 2010 of $1.55 per diluted share.

As we set a new bar for our 2011 performance, we have a number of strategic priorities for our business. These largely center around growing and protecting our current commercial business, advancing our intranasal Clonazepam product candidate, and continuing to look for opportunities to diversify our product portfolio through an active corporate development effort. We also continue to evaluate the JZP-6 program in fibromyalgia, in light of the regulatory feedback we received last year. And, we're planning a mid year update on this program.

Clearly, Xyrem remains the key driver for our Company. So, let me comment in more detail on some of the Xyrem related strategies that underpin our 2010 results and goals for 2011. First, we remain focused on growing our Xyrem product. Earlier this year, we held our annual national sales meeting, where our commercial organization committed itself to continue to work to improve the lives of narcolepsy patients with cataplexy and excessive daytime sleepiness. We are tremendously encouraged by the sustained volume growth that we saw throughout 2010, ending the year with volume growth of approximately 7% over 2009.

In 2011, we are applying additional resources to Xyrem, and pursuing opportunities to generate growth in the current indications, and improve the value of a prescription for Xyrem. We hope to do this through a multi-faceted approach across the diagnosis and treatment of narcolepsy. For example, we are targeting new physicians who treat narcolepsy, and working with existing customers to make sure prescribers understand the best way to set expectations and improve outcomes for patients. As a result of our working closely with the central pharmacy, the pharmacy can now accept prescriptions from physician assistants and nurse practitioners, which we believe will help with patient education and counseling, while simplifying the prescription process for patients who routinely see these healthcare providers. And, we continue to work to implement new programs to ensure that once patients enroll in our Xyrem Success Program, they're likely to have a positive experience and continue to benefit from Xyrem therapy for this life-long condition.

Some of you have met our new SVP of Sales and Marketing, Russell Cox, who joined us last July. Russ and his team are highly focused on growing Xyrem in its current indications in narcolepsy. Results thus far in 2011 have been encouraging. We also continue to see favorable reimbursement coverage for the product, with the majority of patients having out-of-pocket expenses of less than $50 per month. Another key priority for Xyrem is to protect the franchise. In addition to the five patents issued in 2010, another distribution patent was recently issued and listed in FDA's Orange Book. This brings us to a total of nine patents covering the product. We continue to build our IP coverage while also defending and enforcing our patents. Rest assured that enforcing our IP and protecting this business is highest on our team's list of priorities.

An additional update on Xyrem relates to our transition to a new supplier of sodium oxybate. Since our call in November, we've made further progress to help our new supplier, Siegfried, get up and running. Siegfried received quota for the manufacture of sodium oxybate from DEA late last year and has now produced the sodium oxybate qualification batches necessary for FDA approval of this commercial production site. We're comfortable that the transition is on track and we look forward to completing it as planned later this year.

Reflecting on 2010, we helped more patients than in any prior year, with each of Xyrem and Luvox CR. This is a testament to the ongoing commitment and passion of our employees, for which I'd like to thank and acknowledge them. We also continue to be inspired by patients whose lives have been changed by obtaining effective treatment for their disease. Often overcoming incorrect diagnosis, misperceptions related to drug therapy, and misunderstandings about their disease. Their positive stories continue to motivate us to excel.

As you can see from our 2010 results, and the guidance Kate will review, 2011 is shaping up to be a terrific year for Jazz Pharmaceuticals. We expect strong double digit top and bottom line growth, driven by sales of Xyrem and Luvox CR. We look forward to progress on our intranasal Clonazepam program and to reaching decisions about the future of JZP-6. And, our financial position is strong and growing stronger, enabling us to evaluate potential new product opportunities.

Let me now turn to the call over to Kate.

Thanks, Bruce. I'll start with a summary of our full year results and highlight a few items related to the fourth quarter. Full year 2010 revenues grew to $173.8 million, up 35% over 2009. Total Zyrem net sales in 2010 were $142.6 million, up from $96.8 million in 2009, reflecting both price and volume growth. Fourth quarter net sales of Xyrem were also strong, an increase of 36% over the prior year period, with year over year volume growth of 8.3%. In the fourth quarter, we increased our full year estimate for certain government rebates, which resulted in a decrease in net sales of approximately $1 million primarily related to the second and third quarters of the year.

Net sales of Luvox CR for the year grew to $27.4 million from $18.3 million in 2009. As noted in our release, fourth quarter sales include $2 million of previously deferred revenue as a result of a change in the timing of when Luvox CR revenue is recognized. We now believe we have adequate experience with the product to reliably estimate a reserve for product returns. So, as of October 1, we began recording Luvox CR sales, net of estimated returns, at the time of shipment to distributors.

Gross margin for the full year was 92%, compared to 91.6% in 2009. There were a couple of unusual item in the fourth quarter that reduced gross margin to 90.9%. Cost of goods sold included recognition of approximately $700,000 of previously deferred costs associated with the previously deferred Luvox CR revenue, as well as approximately $500,000 of costs associated with start-up activities at Siegfried, our new sodium oxybate supplier. Excluding these two items, gross margin in the fourth quarter would have been about 93%. Note that the $1.3 million gross profit associated with the change in timing of Luvox CR revenue recognition is excluded from fourth quarter and full year adjusted net income.

Total 2010 R&D expenses were $25.6 million compared to $36.6 million in 2009. The decrease in R&D expenses was primarily due to lower spending on JZP-6.In 2010, SG&A expenses were $69 million, compared to $58.7 million in 2009. This increase reflects cost related to strengthening our commercial and G&A organization through key new hires, and costs associated with preparations for the previously planned launch of JZP-6.

In 2010, all of our taxable income was offset by federal and state NOL carryforwards and tax credits. As of year-end, we estimate the balance of our federal NOL carryforwards to be approximately $320 million. Full year adjusted net income was $61 million, or $1.55 per diluted share, compared to a 2009 adjusted net loss of $1.5 million, or $0.05 per share. Please refer to our press release for GAAP results and reconciliation of GAAP and non-GAAP financials. Our earnings growth in 2010 was driven by strong sales growth, prudent expense management, and an improved capital structure with significantly lower interest expense.

We ended the year with approximately $45 million in cash, an increase of $22 million during the fourth quarter. At the same time, our outstanding debt continues to decline as we make quarterly principal payments of $4.2 million on our term loan. The outstanding amount of which was $41.7 million at the end of the 2010. I'll also note that the interest rate on the term loan recently declined to 3.75% due to the improvement in our leverage ratio.

Now, turning to 2011. I'll review our financial guidance in the context of the priorities and goals that Bruce outlined. For 2011, we expect total net sales of $232 million to $245 million, representing year-over-year growth of 36% to 44%. This includes Xyrem net sales in the range of $200 million to $210 million, reflecting year-over-year growth of 40% to 47%. Luvox CR sales are expected to be in the range of $32 million to $35 million, an increase to 17% to 28%. We expect gross margin to continue to be greater than 90%. And, R&D expenses are expected to be in the range of $20 million to $24 million, which is lower than 2010, both in dollar amount and as a percent of sales. This primarily includes costs for further development of our intranasal Clonazepam product candidate which we anticipate advancing into an additional clinical trial later this year, as well as internal head count related costs. We do not at this time anticipate significant spending in 2011 on our other development stage programs, JZP-6 for fibromyalgia and solid oral dosage forms of sodium oxybate.

SG&A expenses for the year are expected to be in the range of $87 million to $93 million. A significant dollar increase relative to 2010, but lower as a percent of sales. About half of the increase over 2010 is due to higher compensation expenses, including a large increase in stock-based compensation. The remainder of the increase is primarily due to anticipated legal expenses associated with protecting our Xyrem business, and additional investments in Xyrem marketing, promotion and analytical support services. Note that we expect a total increase of approximately $7 million to $8 million in stock based-compensation expense. Primarily due to the higher Black-Scholes value of stock option grants at a higher share price. And, also including an estimated $2.4 million charge in the first quarter related to the departure of our former president. Most of the stock-based compensation expense is reflected in SG&A.

Our guidance assumes that we continue to have the ability to fully offset taxable income in 2011 with NOLs and credits. At some point in 2011, we may determine that it is more likely than not that we will be able to fully utilize our NOLs and credits. At that point, in accordance with GAAP, we will reverse the valuation allowance on our deferred tax assets and recognize a non-cash P&L gain. After that point, we will record a tax provision even though we still may not be paying cash taxes. We intend to adjust any non-cash tax gains and expenses out of our adjusted net income. Our 2011 guidance assumes a fully diluted share count of 45 million to 46 million. The expected increase relative to the fourth quarter of 2010 is due to the impact of a higher assumed average stock price, which results in a higher number of outstanding options and warrants being included in the fully diluted share count. And, also assumptions about option and warrant exercises.

On the bottom line, we expect continued very strong earnings growth and cash generation for 2011 with adjusted net income in the range of $122 million to $132 million, and adjusted net income per diluted share of $2.70 to $2.90. An increase to 74% to 87% over 2010. Note that our expected earnings growth rate is about double the expected sales growth rate, as we realize the benefit of significant operating leverage in our business model.

Based on our strong results during 2010, and the progress of our business so far during 2011, we remain very optimistic about our ability to continue to deliver compelling growth and build shareholder value. Thanks, again, for joining our call today. And, I'll now ask the Operator to open up the call for questions.

(Operator Instructions)Our first question comes from Rich Silver with Barclays Capital. Please proceed.

Good afternoon. Just on Xyrem pricing, I know that in the past you've cautioned not to assume this kind of magnitude of price increases that we've seen in the past couple of years. Can you give us some sense of beyond 2011, what we should expect? And also, in the past you have cited $35,000 per patient per year for certain orphan drugs, just as a means of comparison and that we had a long way to go. Can you just verify what Xyrem's current price per patient per year is now, at least on an apples to apples basis with that benchmark that you might have used in the past in terms of $35,000?

So Rich, this is Bruce, hi. On your first question, we typically don't forecast long-term price increase strategy given that a lot can happen. But certainly our 2011 revenue guidance does contemplate some price increase. So I think I'll hold off on answering the question beyond 2011. And as to the second part of your question, I'm not quite sure where the $35,000 precise figure came from. It's certainly true that there's a wide range of annual costs of therapy for orphan drugs from some that are lower than that, to many that are considerably higher to that. But to answer your specific question about annual cost of therapy, let me hand this over to Russ Cox.

Yes. So annual cost of therapy currently is $30,000 per year. And as you can imagine, we continue to work with payers, with patients, and do lots of market research around what our pricing options could be.

Okay. And just if I may, just another one on business development and what your plans are. You obviously made the decision, looking at your current pipeline, not to develop further the oral solid dose version of Xyrem. Maybe you can elaborate on that. And then just, as far as business development activities, not in your guidance, but should we assume, as you said in your prepared remarks, that we could see that and that could also potentially change the financial outlook for the Company?

Rich, I'll take the first part of that question, and then maybe Kate can comment on how we're thinking about business development. On the solid oral dosage forms, the comment wasn't meant so much to suggest that we had made a decision not to pursue it. But merely that in light of the uncertainly surrounding our fibromyalgia program we need to re-think the best way to move forward with solid oral dosage forms. We had originally contemplated that as part and parcel of a fibromyalgia strategy. And so, as we continue to evaluate the JZP-6 program and reach final decision there, at the same time we're taking another look at the solid oral dosage form program to make sure we're building in the very best thinking on that. I think Kate's comment in guidance was merely meant to suggest that we don't expect this significant amount of dollar spending on that effort during 2011. And let me have Kate take the second part of your question.

Yes. Hi, Rich. So, as we've talked about in the past, we do have an active BD effort ongoing. We're constantly evaluating potential opportunities. Guidance, as you point out, doesn't contemplate any deals because you can't predict timing and you can't predict impact. But as you point out, we are continuing to build the financial flexibility to be able to do a deal if we do find something that meets our screen. And so it's possible that at some point during the year we could announce a deal. But that's not something that I don't think we could anticipate in guidance.

Okay. I'll step back in the queue. Thanks very much.

Our next question comes from Bill Tanner with Lazard Capital Markets. Please proceed.

Thanks for taking the question. For Bruce, maybe, and/or Russ, just on the increase in G&A, I know you did mention, or Kate mentioned, that part of it was the legal expense. How should we think about the incremental marketing expense and when you might see some traction from that?Because as we look at the Xyrem guidance, it looks incredibly conservative. Either the expectation is not much in the way of volume growth, or if there is volume growth fatherly modest price increase. So I just wanted to know what kind of traction you think you might get in 2011. And I have a follow-up, too, please.

Thanks, Bill. This is Russ. So, as you can imagine, a lot of these programs that we are now focused on, are programs that we learned could improve the patient experience through thinking about what we wanted to do with the fibromyalgia launch.Now that we're 100% focused o narcolepsy, it's clear that these programs can add value. And so we've seen a little bit of traction from the nursing program that we initiated in the fourth quarter of 2010. We're enhancing that in 2011 and we're adding some additional ways to improve the patient experience. I do believe, though, the majority of the impact will actually hit in the second half of 2011.

Okay. And then, Bruce, just on JZP-6, I certainly appreciate the fact that the Company wants to thoroughly evaluate the alternatives. I'm just wondering what incremental data points you might be able to get from the Agency or elsewhere to lead you to a decision in mid this year that you might not be able to make presently?

Yes, Bill, before I take that questions, let me just go back to the answer to the last question. When Russ said it would expect to see the impact more as we move through the second half of the year, that would be any additional revenue that would come through success of the programs. On the spending side, I don't think we're necessarily targeting second half of the year. We're making some investments. We'll look to see how those payoff and then decide on where to go from there.

On JZP-6, great question about timing of our decision. We do, in fact, still have outstanding questions to FDA that we'd like feedback on before we get to our best recommendation as to what to do going forward. I'll remind everyone listening to the call that we're in a situation here where waiting to make a decision is not costing us in terms of ongoing expense. We don't have an active ongoing expensive development program here. And so I think our view is taking a little more time to make sure we get to the very best possible decision is in everyone's best interest as opposed to something where you're trying to get to a fast decision because you need to decide whether to fish or cut bait with respect to ongoing expenses. So we are expecting a little more information, which we think could be helpful to us. And our view is we're not in a hurry so much as we have a strong desire to get to the right answer.

And Bruce, just, whatever you can say now, it seems like it's pretty likely you'd have to contemplate doing additional clinical trials, is that fair to say?

Yes. I would say we cannot imagine any scenario at this point where we could move forward without additional clinical work. That's been a pretty clear message from FDA in the complete response letter and in our meeting post that time in the fourth quarter. That obviously was a surprise to us, but that's what FDA has laid out for us.

And even if you did it under an SPA, wouldn't you have reasonable amount of concern that for safety reasons the FDA still might not abide by that?

Yes. I'm not sure Jazz Pharmaceuticals is going to be anymore expert than the rest of the world on SPAs this year. And I think what the whole world, or the US has seen, anyway, is that an SPA is not an absolute guarantee. It's one of several means, I think, of getting to the best possible alignment with FDA based on everything's that's known now as to what would need to be done and how it would be interpreted later. But I think FDA always reserves the judgment to take into account all known information at the time they're making a decision.

Maybe just one last one. Can you just remind us of the strategic importance of Siegfried as the manufacturer?

Yes. We were notified by our previously API manufacturer, Lonza, in early 2010 that they were planning to shut down the facility in the United States responsible for 100% of the production of our raw material. As a result of that, we moved forward with identifying a new supplier. We chose Siegfried as a company that we believe would be an excellent long-term API supplier for us, and we've been actively working on this transition since then. It's a process that has a number of steps. Some of which all of you have tracked with us over the course of the past year, whether that's getting the initial administration to handle Schedule One manufacturing, getting the initial DEA quota. And, as I now said, doing the production, creating the batches, getting the data, and later submitting that to FDA and getting final sign off for commercial usable product.

But this all arose out of that initial decision on Lonza's part to exit a site. And I think we're tracking very much right on to what we had outlined fairly early on in 2010 as the somewhat time-consuming process to finish that transition to Siegfried. While we were putting that transition plan in place, of course, an important part of insuring continuous product supply was building up inventory to take us through that transition period. We worked very closely with Lonza over the course of 2010 to build out all of the inventory we would need for 2011 and into 2012. So we think we're both on track for the Siegfried transition, as well as in a good position to have adequate API inventory on hand throughout that process.

Okay. Great. Thanks very much.

Our next question comes from Corey Davis, with Jefferies. Please proceed.

Thanks. First question on business development and in licensing or acquisitions.You mentioned that your cash is nice and growing. My question is, would you be willing to use your currency in equity for any potential acquisitions or are the debt markets right now more attractive?

Hi, Corey, this is Kate. Our first preference today would be to use cash and debt. We are generating quite a bit of cash and believe we do have some debt capacity. So that's probably the first place we would look today.

Okay. And second question, probably for Bruce, can you give us a little more details on the clinical path and the time line for clonazepam? Do you have to do any more things like do you have to do any more clinical trials given the different route of administration? How long would a Phase III trial take? And what's the earliest you could see this coming to market? Things like, do you have to have a positive control in there or would it just be in the pivotal program a comparison to placebo?

Corey, unfortunately I'm probably not going to answer any of those questions. Our update at the beginning of 2011 was really designed to tell people that we had had positive outcomes in our Phase II work where we saw a good efficacy of our intranasal clonazepam. And positive data from a PK study involving our revised formulation, or improved formulation, to give us dose proportionality across our two-milligram, 3-milligram, 4-milligram dosage strengths. That's what we needed to know.We could move forward in the program, which we intend to do in the second half of 2011. But we're not prepared at this point to answer questions -- and I wrote down all of your questions, because they're all good ones -- in terms of our specific clinical development plan and timing.

Is that because you don't have the full plan set yet or because you just don't want to divulge it for competitive reasons?

A little bit of both, to be honest with you. We're still finalizing plans for our next study and making sure that dovetails with a complete clinical and regulatory plan that gets us to market as soon as we can. We think there's a great unmet medical need for this product with these patients that have one approved therapy today, which is Diastat, a very efficacious product that, unfortunately, is not used by a large fraction of the potential patient population. And given that the alternative today is treatment in an emergency department with an IV drug, we'd love to get a better solution onto the market sooner rather than later. But we're working with experts inside and outside the Company to make sure we've got all our thinking lined up for the best possible development program, and when we've got that all nailed down, we'll be back with more information.

Okay. Great. And congrats on a great 2010.

(Operator Instructions)Our next question comes from Rich Silver with Barclays Capital. Please proceed.

Yes. Coming back to the question of your own pipeline versus business development, it sounds like the opportunity costs of the cash favors business development over your own early stage pipeline. Is that a correct assumption to make? And if so, maybe you can remind us again what types of products you're exploring on the BD front.

Yes, so let me take part of that and Kate may want to add some things. A couple of comments. One would be, we think we've got a great product candidate in the intranasal clonazepam, and that's why we're excited about moving that one forward. Whether other R&D pipeline opportunities come from our own thinking, as did JZP-8, or come from the outside, is a great question, and I'd love to have both sets of opportunities and then choose the best ones. But I think it's important that, when we talk about our business development efforts, which I did in my remarks, and we've done a couple times now in response to questions, we don't necessarily just mean R&D pipeline opportunities. When we're looking at external opportunities, that would include on market products that we think would be a good fit with our commercial business. So if we weren't clear about that, I apologize. But when we talk about scanning the external environment, honestly, the focus is at least as much on, if not more on, products that are already on market or very near the market than just other early R&D pipeline opportunities.

Okay. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's presentation. You may now disconnect and have a wonderful day.