Jazz Pharmaceuticals PLC (JAZZ) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Jazz Pharmaceuticals conference call.

(Operator instructions.)

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

Welcome to the Jazz Pharmaceuticals first quarter 2011 financial results and business update conference call. Our results for the quarter, an update on our commercial and development activities and updated financial guidance for 2011 were reported in a press release issued earlier today. The release is available on our company website.

With me from the Company are Bruce Cozadd, Chairman and CEO; Kate Falberg, CFO; and Russ Cox, SVP of Sales and Marketing. Following some introductory comments we'll open the call for your questions.

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 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-Q for the Quarter Ended March 31, 2011 with the SEC in the next week.

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 first quarter results reflect the tremendous energy and enthusiasm of our company around the potential of Xyrem and our renewed focus on driving growth of the product in narcolepsy. Combined net sales of both of our products grew 46% over the first quarter of 2010, and volume growth was strong for both products. I'm very pleased to report that Xyrem volumes were up 12% over the prior year period, and were down only modestly from the fourth quarter of 2010, as annual reimbursement plan changes had a smaller impact than in prior years.

During the quarter we continued to execute on various initiatives aimed at improving the overall patient experience. In particular, the central pharmacy is working to ensure that new patients receive calls from a registered nurse to answer questions about the therapy and to ensure that patients are aware of the various assistance programs available to them. We are working hard with physicians to improve expectation setting with patients in an effort to improve patient compliance and persistence with Xyrem. We are also pleased by the passion and commitment of our sales force in rolling out our new initiatives to improve physician communication with patients. We continue to be very encouraged by the Xyrem volume trends and look forward to reporting further progress in future quarters.

Regarding sodium oxybate supply for Xyrem, we and Siegfried remain on track for FDA approval of the site later this year. Siegfried has manufactured the registration batches of sodium oxybate, the required stability data have been collected and analyzed, and we are currently planning to file this quarter for regulatory approval of the site. As a reminder, we have sufficient inventory on hand for all of our projected needs for this year and into next year.

Finally, in keeping with our commitment to helping patients with narcolepsy, I'm very pleased to report that beginning this quarter we are contributing to a charitable organization, The Caring Voice Coalition, to help ensure access to medicines for patients with narcolepsy.

Turning to the pipeline, we have some important updates about the JZP-6 and JZP-8 programs. Regarding JZP-6, we have been evaluating next steps for the program in light of the complete response letter we received from FDA last October and additional interactions with the agency. We have now concluded that the additional clinical trials requested by FDA would take years to complete, would require a significant investment and would not sufficiently reduce regulatory uncertainty. While we continue to believe that Xyrem could be an important treatment option for fibromyalgia patients and treating physicians, we do not at this time believe that funding this clinical work would be a good use of our resources. Therefore, unless there is a significant change in the requirements for preapproval clinical trials and/or we are able to gain additional regulatory certainty, we do not intend to move forward with additional clinical work.

I want to express our gratitude to all of the fibromyalgia patients and investigators who participated in our development program over the years and acknowledge the efforts of many employees in conducting the clinical program. This is clearly a disappointing outcome given the unmet patient need in fibromyalgia and the results of our clinical trials.

Separately, we continue to evaluate next steps for JZP-8, our product candidate for acute repetitive seizures in epilepsy patients. We've recently received new input from outside advisors who suggested significant enhancements to the development plan to improve the probability of regulatory success. We also have additional information about the competitive landscape. Given this input and the associated costs and timing, we are reevaluating whether and how to proceed with future development for the intranasal clonazepam program.

These pipeline developments are unfortunate, as developing new products is an important part of our corporate strategy. Over time we intend to reinvigorate our R&D efforts. In the meantime, we are pleased to be serving patients with OCD and patients with narcolepsy, a serious medical condition where we have a firm and growing corporate commitment.

Now let me turn the call over to Kate to discuss our first quarter financial results and updated 2011 guidance.

Thanks, Bruce.

2011 is off to a great start, as evidenced by our results for the quarter and increased guidance. Total Xyrem net sales for the quarter were $42.8 million, up 49% from the first quarter of 2010. Net sales were negatively affected by higher gross-to-nets compared to the year ago first quarter, due primarily to higher government rebates and discounts and higher specialty pharmacy program costs. For the balance of the year, we expect gross-to-nets to be more in line with last year, due in part to more favorable terms under our new contract with [SVS].

Net sales of Luvox CR for the quarter were $7.1 million, up 29% from the first quarter of last year. This increase was driven primarily by increased prescription volumes.

Gross margin for the quarter was 94%, compared to about 92% in 2010, reflecting the impact of higher Xyrem sales as a percentage of total sales.

SG&A expenses for the quarter were $19.9 million, compared to $16.8 million for the prior year period. This increase is primarily due to higher headcount-related expenses, including stock-based compensation. The quarter also included $1.1 million in expenses associated with the departure of our former president. The remainder of the increase was due to higher legal and IT expenses.

First quarter R&D expenses were $3.7 million, compared to $6.2 million in 2010, primarily due to lower spending on pipeline programs.

Combined SG&A and R&D was essentially flat versus the prior year first quarter, at $23.6 million.

Adjusted net income in the quarter was $26.8 million, or $0.59 per diluted share, a significant increase from adjusted net income of $6.1 million, or $0.18 per diluted share, in the first quarter of 2010. Please refer to our press release for GAAP results and reconciliation of GAAP and non-GAAP financial measures.

Our balance sheet continues to grow stronger, as we ended the quarter with $65 million in cash against $37 million of long-term debt.

Now turning to our financial guidance for the year, we are updating our guidance today to reflect the stronger Xyrem sales growth we saw in the first quarter and the price increase of last month. We now expect Xyrem net sales to be in the range of $205 million to $215 million, reflecting growth of 44% to 51% over 2010. Luvox CR sales guidance is unchanged, and it incorporates the price increase implemented yesterday. Total net sales are now expected to be $237 million to $250 million, representing growth of 39% to 47% over 2010.

We will be evaluating R&D spending in light of the recent pipeline decisions and are not ready today to update that guidance specifically, but we now expect that combined operating expenses will be lower than our prior guidance. We are estimating that SG&A and R&D expenses combined for the year are likely to be in a range of $105 million to $110 million, which is lower than the prior combined guidance of $107 million to $117 million.

Based on higher expected sales and lower expected expenses, our bottom line guidance has increased significantly, with adjusted net income now in the range of $136 million to $146 million and adjusted net income per diluted share of $2.95 to $3.10, an increase of 90% to 100% over 2010. This growth rate is more than double the expected sales growth rate as we continue to realize the benefit of significant operating leverage in our business model.

Thanks again for joining our call today, and I'll now ask the operator to open up the call for your questions.

Thank you.

(Operator instructions.)

And our first question comes from the line of Rich Silver, with Barclays Capital. Go ahead.

Good afternoon. I was wondering if you could update us on your thoughts around business development and whether there have been any changes in light of the pipeline decisions.

Hi, Rich. This is Kate. No change in the strategy here. We're still looking for new products that we can efficiently commercialize to specialty audiences. We continue to be committed to developing products as an important part of our corporate strategy, so over time we do intend to bring in new product candidates when we can find ones that fit with our strategy commercially and where the clinical cost, timelines and risks are things that we're comfortable with. And we've always said that we're not in the business of doing early-stage discovery-type work or very early-stage R&D, so we continue to look at things that are further along in development or already on the market.

Okay. And then a second question on the Xyrem guidance in light of the fact that that guidance has increased to reflect the April price increase, what does that mean in terms of further price increases in the guidance? Are they included or not included, further price increases this year?

Yes, Rich, you know, the reason for the increased guidance is largely due to the fact that we had a good, strong first quarter. We continue to see solid volume growth of the product. You'll recall that our growth rate last year was varied over the four quarters between 5% and 8%. A little better than that in the first quarter. We're not sure that 12% is a good number to use for the full year because we think part of that growth was doing a better job on the fourth quarter/first quarter dip we had seen in prior years. So that piece of the improvement we don't think recurs for the other three quarters. But, nonetheless, we saw very solid volume growth, and that puts us on track to achieve higher net sales.

Specifically to your question about what does that assume about further price increases, we, as we did when we first gave guidance for 2011, we're trying to give you guidance that encompasses our views of total revenue, which is volume plus price, and in general we don't comment specifically on plans for future price increases.

And then just one last one on the KKR lockup, I believe that expires in July. Is that correct? And is there any possibility that that's, I don't know, renewed or any chance that there -- that that could be extended, just any kind of color around the lockup terms?

Well, Rich, the NOL lockup agreement which was signed, in fact, by a number of our larger board-represented investors almost two years ago does expire in July. I wouldn't say that's specific to KKR. I would not expect that we would need to or want to extend that agreement, and maybe I'll have Kate explain a little bit about why.

Yes, so to add a little background, we entered this year with $320 million of NOLs. And, as you can see from our guidance today, we're eating into those NOLs at a fairly rapid clip. So we're at this point pretty confident that we'll be able to fully utilize those NOLs. And the way the rules work, if there was a Section 382 ownership change, based on where our market cap is in this range we don't see that there would be any significant limitation on our ability to run those NOLs out.

Okay. Thank you.

Our next question comes from the line of Bill Tanner, with Lazard Capital Markets. Go ahead.

Thanks for taking the question. Very nice quarter. Bruce, just on -- you sort of answered the question I was going to ask in terms of the sequential year-over-year increase in volume growth. You mentioned that managing better the dip from the fourth quarter to the first quarter. Could you elaborate a little bit on that? I mean, what was actually done? Because I know you guys have called out historically this is something that's been seen. And is it something that goes throughout, or through most of the first quarter, meaning would you still have seen -- did you still see pretty strong growth maybe in the back half, back part of the first quarter, where it really wouldn't have been so much attributable to just managing that dip? Just trying to understand a little better, I'm sure as you guys are, what's the real organic run rate.

Yes, Bill, let me give the short answer, which is I think the growth we've seen was very strong even without that. I don't mean to single that out as the only reason. But we've got Russ Cox, our SVP, Sales and Marketing, with us here in the room. Let me have Russ take that question for you.

Yes, thanks, Bill. So, as you know, we historically have seen that first quarter drop from the fourth quarter, and while I can say that we managed it better, it's not that we didn't see any dip at all, it just wasn't quite as dramatic as in previous years. And, having said that, if you were to sort of back out what would be the expected dip from historical years we're still looking at single-digit, high single-digit growth, so still pretty sustainable.

Okay. And then maybe as it relates, maybe it's a question for Kate, just in terms of the OpEx, I mean, lumping them together, and I appreciate the fact that there are still some uncertain times about -- thinking about the R&D spend, but is it conceivable as we look at -- so it's been -- the biggest -- the sum total has been lowered a little bit, maybe moving a little bit or increase in the spend on G&A and dialing down R&D, or, as we think about the original guidance, how does that relate to what's been, I guess, lumped together here?

Yes, Bill, so we're thinking about the investments that we're making to support the commercial business, and we're thinking about the investments we need to make to protect the business. And so we're weighing resource allocation kind of as we speak and weren't ready today to figure out exactly which line item on the P&L things are going to fall on.

But it's conceivable, maybe over-simplistic way to think about it is taking a little bit from what you would have spent on R&D and plugging it in to the G&A line.

Yes, that's quite conceivable.

And then last question, just on the margins, I mean, obviously, strong margins in the quarter, and, Kate, you called out because of the mix. Is the, the higher than 90%, is that just kind of the standard boilerplate Jazz greater-than-90% gross margin or we should -- should we really be looking at something at least as good as what you saw in the first quarter for the balance of the year?

We don't see anything that would significantly change the number from the trend that it's been on, Bill, but occasionally we have some international sales that move the number around a little bit, which is why we don't really pin down the guidance too specifically.

Okay. Okay, thanks very much.

(Operator instructions.)

Our next question comes from the line of Corey Davis, with Jefferies. Go ahead.

Thanks very much. I wanted to ask a little bit about business development and a little bit of R&D spend in the context of earnings, because now that you guys for how many -- for the past couple quarters have nicely raised guidance, beat and raise, beat and raise, it's becoming addictive, this earnings upside, but anything you do BD-wise that enhances the pipeline, which sounds like there's not much left there, is going to be by definition dilutive, so, I guess, how do you balance kind of the Street's insatiable desire for continued earnings upside with kind of the need to look out five, 10 years from now and building a real company by in-licensing things?

Well, Corey, I think you did a nice job --

And by real I didn't mean you're not real now.

-- I thought you did a nice job of answering the question at the end with the need to balance long term with short term. You know, I think the best way to think about it is we have anticipated and continue to anticipate some level of R&D investment that we can afford that's consistent with strong earnings growth at the bottom line, which we've been experiencing. That will contribute to a higher growth rate for the Company over the long term. And I think our job is to find the best places to invest those dollars, and we take that very seriously.

I think the announcements we've made about our pipeline should show you that we're serious about that, that we aren't going to spend money just to spend money. We want to spend money to bring products to market that will help patients, products that are consistent with our commercial focus and that we feel confident will make a difference to the Company and its shareholders in the future. And today, unfortunately, we're in a position where we've probably got more dollars available to fund that than we have projects we're confident in moving forward. That can change, and our job is to find those right opportunities or to rethink existing opportunities and make them fit.

But to say that anything would necessarily be dilutive to prior estimates, you know, we've given estimates that don't assume no spending on R&D. They do assume some spending on R&D. And if we thought about doing a transaction later in the year it might be that we do have money already in our guidance to fund some of that R&D. So I'm not going to accept as a given your supposition that it's necessarily going to take our guidance down.

Okay. And on the volume growth for Xyrem, do you have any sense for what mix that 12% might comprise new patients versus dose creep and/or improved compliance among existing patients?

Yes, so if you were to break down the growth, we're seeing really nice improvement in patients coming back to therapy who had been on therapy before, and we're also seeing a very nice improvement in what I would characterize as true compliance. As you know, we put a nursing program in place that was geared to be able to have more meaningful conversations with patients while they're starting therapy and setting expectations, and we worked very hard with physicians to make sure that they also are having the right conversations with patients, and it appears to be paying off.

Great. That's all I had. Thank you.

Thanks, Corey.

And, ladies and gentlemen, we show no further questions at this time. I'd like to turn the call back over to Ms. Knoefler for any closing remarks. Please proceed.

Thanks again for joining our conference call today. We look forward to seeing you all at upcoming conferences and meetings. As a reminder, we're scheduled to present at the Bank of America Merrill Lynch Healthcare Conference on May 10 and at the Jefferies 2011 Global Healthcare Conference in June. Thanks, and have a great afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.